Unlike is not the hindrance of entrepreneurs. Moreover,

Unlike the case discussed above, there is
an argument that financial slack is strongly associated with inefficiency regarding investment projects that do not yield value for
shareholders, which in turn lead to poor firm performance. For instance, if firms
with surplus slack become satisfied, too optimistic and feel less obliged to
make investments in Research and Development, the way of allocation of
financial slack for investments is subject to the philosophy and interests of
the owners, which may even be conflicting, and it can be considered that the
lack of resources is not the hindrance of entrepreneurs. Moreover, resource constraint theorists argue that slack reduces
entrepreneurial creativity (Baker and Nelson, 2005, Mosakowski, 2002). Likewise, (Zona (2012), Debruyne et al., 2010) argued that the existence of excess financial slack can provide
poor performance by protecting the company from external shocks,  making managers believe they are able to
react effectively to competitive pressures, favoring the managerial
accommodation and irrational optimism, but also make them less motivated to do
and leading inadequate implementation of strategies. Previous empirical studies
discussed this opposing views in argument of an inverted U-shaped relationship
between financial slack and firm performance. Particularly, the performance
benefit of financial slack as supported by behavioral theorists, increase rapidly with slack, but then level off as there are too
 many valuable opportunities out there
which entrepreneurs can look for (Nohria
and Gulati, 1997, Hambrick
and Finkelstein, 1987).  According to Nohria and Gulati (1997), the costs of slack are limited when slack is low, but start to
rise quickly when slack gets beyond a certain level and the net effect of these
two ways, an inverted U-shaped relationship, suggests that holding an optimum
level of slack is best in any organizational setting.

Slack resources, however, do not deed themselves and simply
holding resources is not enough to create value out of those resources (Sirmon
et al., 2007) and previous studies documented the relationship between
financial slack and firm performance by investigating when, where, and how
these resources impact performance.  With this regard, we reviewed the previous
empirical investigation in accordance with the type of relationship studies that
slack and performance have, that is, we organized literatures based on positive, negative and U-shaped
relationship of financial slack and firm performance as follows.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Several studies documented positive relationship between
financial slack and frim performance. For instance, Vanacker et al. (2013) taking venture capital and angel investors as moderator on the
relationship of slack and performance, found robust positive relationship
between financial slack and firm performance in Venture capital-backed firms
when investors hold high ownership risks. Similarly, Picolo et al. (2017) using the gross profit margin of Brazilian and Chilean firms as
measure of financial slack, documented that high discretionary financial slack exhibited
negative extent and a positive association with the financial resources demand,
and indicated that firms become inspired in new investments and in strategic
choices when there is  financial
resources are highly demanded. Argilés-Bosch et al. (2016) investigated the impact of absorbed and unabsorbed slack on
firms’ performance and documented that unabsorbed
slack has a more promising effect on future firm performance than absorbed
slack, that is, the measure of  absorbed
slack indicators used in their study (the
ratio of inventory to sale, of property, plant and equipment to sale and
selling, general and administrative expenses to sale) found to be
significantly and  negatively associated  with firms’ forthcoming performance, the and
all indicators of unabsorbed slack (financial slack, equity-debt slack and cash
slack)found to have positive, negative, and non-significant influences,
respectively. The evidence documented in their study has implication for
resource redeployment by suggesting that firms choose to withdraw resources
from existing business and redeploy them to cultivate new and more promising
business opportunities. The empirical investigation of the importance of slack for new
organizations facing ‘tough’ environments (Bradley et al., 2011), reveal financial slack enhancing capacity
(in hostile and dynamic environments), that is the strong positive correlation
between slack and performance for new firms was in low discretion environments
(hostile and stable environments). Also, Marlin and Geiger (2015), on the basis of a
configurational approach, examined the relationship between organizational
slack and performance and the study found that configurations with higher
levels of slack outshine those with lower levels of slack signifying positive
association between financial slack and performance.

To the contrary, several
previous studies found inverse relationship between financial slack and firm
performance. Shahzad
et al. (2016), by considering slack
heterogeneity (human, financial and innovational slack), they investigated the
slack resource-corporate social performance relationship of US firms. The
result of their study supported the agency theory view of negative relationship
between financial slack and corporate social performance. 

investigations also found a unique relationship between financial slack and
performance which is called curvilinear or inverted U-shaped. For instance, Tan (2003)
investigated the curvilinear relationship between financial slack and
performance of Chinese firms and the result confirmed
that the relationship between the two variables (financial slack and
performance) is hardly linear. This study also suggested that the firm should
have an optimum level of slack, as denoted as the peak, then after, the cost of
slack curdles the relationship between slack and performance, that is up to
some level, slack can be a basis of competitive advantage, that enables the
firm to chase high-variance opportunities while handling downside insecurity;
beyond the critical point, slack becomes a value-destroying force. Furthermore,
(Tan and Peng, 2003), investigated the financial slack
and Chinese firm performance and they depicted that organizational theory
provide strongly predicted  when dealing
with unabsorbed slack and agency theory offers strong support concerning
absorbed financial slack of Chinese firms and, they found curvilinear relationship
between financial slack and firm performance. (George, 2005), using the sample of privately owned
firms; using high discretion, low discretion and transient category of
financial slack, documented inverse U-shape for low-discretion slack to
performance relationship, positive and linear relationship of high discretion
slack and performance and positive and concave relationship of transient slack
and privately owned firm performance. Kim et al. (2008) ,
Wiersma (2017b),
Danneels (2008),
also are among others, who investigated the relationship between financial
slack and firm performance and documented the inverse U-shaped or curvilinear


I'm Owen!

Would you like to get a custom essay? How about receiving a customized one?

Check it out