Financial Slack and Firm performance - Evidence from India
Author(s)
Nufazil Altaf* (Research Scholar, Department of Management Studies, Central University of Kashmir, J&K, India) *Corresponding author's Email
Citation
Altaf, Nufazil (2019), “Financial Slack and Firm performance- Evidence from India”, MERC Global’s International Journal of Management, Vol. 7, Issue 1, pp. 113-119.
Article history
Submitted: October 08, 2018, Revision received: October 29, 2018, Accepted: November 10, 2018
This study aims to investigate the impact of financial slack on firm performance in Indian Companies in light of two competing theories of corporate finance. By investigating a panel data set of 283 Indian firms over the period of 5 years, the empirical results of ordinary least squares and fixed-effects regression analysis confirmed a significant negative linear relationship between available slack and firm performance. In addition, we found a positive relationship between potential slack and firm performance. Moreover, the results of the study lend support to the agency theory of finance.
Keywords
Financial slack, Firm performance, Agency theory, Panel data, India.
References / Bibliography
Altaf, N. and Shah, F. (2017), “Slack heterogeneity and firm performance: Investigating the relationship in Indian context”, Research in International Business and Finance, Vol. 42, pp. 390-403.
Altaf, N. and Shah, F. A. (2015a), “Internationalisation and firm performance of Indian firms: Does product diversity matter?”, Pacific Science Review: Humanities and Social Sciences, Vol. 1, Issue 2, pp. 76.
Altaf, N. and Shah, F. A. (2015b), Moderating effect of corporate governance on the relationship between free cash flow and asset utilisation, Excel India Publishers, pp. 197-205.
Ang, S. and Straub, D. W. (1998), “Production and transaction economies and IS outsourcing: a study of the US banking industry, MIS Quarterly, pp. 535-552.
Baker, T. and Nelson, R. E. (2005), “Creating something from nothing: Resource construction through entrepreneurial bricolage, Administrative Science Quarterly, Vol. 50, Issue 3, p. 329-366.
Bourgeois, L. J. (1981), “On the measurement of organisational slack”, Academy of Management Review, Vol. 6, Issue 1, pp. 29-39.
Bourgeois, L. J. and Singh, J. V. (1983), Organisational Slack and Political Behaviour Among Top Management Teams, in Academy of Management Proceedings (Vol. 1983, No. 1, pp. 43-47).
Cheng, J. L. and Kesner, I. F. (1997), “Organisational slack and response to environmental shifts: The impact of resource allocation patterns”, Journal of Management, Vol. 23, Issue 1, pp. 1-18.
Cyert, R. M. and March, J. G. (1963), A behavioural theory of the firm, Englewood Cliffs, NJ.
Damodar, G. (2004), Basic Econometrics, The McGraw-Hill, New York, USA.
Daniel, F.; Lohrke, F. T.; Fornaciari, C. J. and Turner, R. A. (2004), “Slack resources and firm performance: a meta-analysis”, Journal of Business Research, Vol. 57, Issue 6, pp. 565-574.
Dimick, D. E. and Murray, V. V. (1978), “Correlates of substantive policy decisions in organisations: The case of human resource management”, Academy of Management Journal, Vol. 21, Issue 4, pp. 611-623.
Fonseka, M. M.; Tian, G. L. and Li, L. C. (2014), “Impact of financial capability on firms' competitiveness and sustainability”, Chinese Management Studies, Vol. 8, Issue 4, pp. 593.
Geiger, S. W. and Makri, M. (2006), “Exploration and exploitation, innovation processes: The role of organisational slack in R & D intensive firms”, The Journal of High Technology Management Research, Vol. 17, Issue 1, pp. 97-108.
George, G. (2005), “Slack resources and the performance of privately held firms”, Academy of Management Journal, Vol. 48, Issue 4, pp. 661-676.
Greve, H. R. (2003), “A behavioural theory of R&D expenditures and innovations: Evidence from shipbuilding”, Academy of Management Journal, Vol. 46, Issue 6, pp. 685-702.
Hambrick, D. C. and Snow, C. C. (1977), A Contextual Model of Strategic Decision Making in Organizations, in Academy of management proceedings (Vol. 1977, No. 1, pp. 109-112), Briarcliff Manor, NY 10510: Academy of Management.
Hsiao, C. (2003), Analysis of panel data, Cambridge University Press, USA.
Jensen, M. C. (1993), “The modern industrial revolution, exit, and the failure of internal control systems”, The Journal of Finance, Vol. 48, Issue 3, pp. 831-880.
Jensen, M. C. and Meckling, W. H. (1976), “Theory of the firm: Managerial behaviour, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3, Issue 4, 305-360.
Khanna, T. and Palepu, K. (2000), Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups”, The Journal of Finance, Vol. 55, Issue 2, pp. 867-891.
Klevmarken, N. A. (1989). Introduction. European Economic Review, 33(2-3), 523-529.
Koop, G. and Steel, M. F. (2001), Bayesian analysis of stochastic frontier models, A companion to theoretical Econometrics, Blackwell, Oxford, pp. 520-573.
Lee, S. (2011), “How financial slack affects firm performance: evidence from US industrial firms”, Journal of Economic Research, Vol. 16, Issue 1, pp. 1-27.
Leibenstein, H. (1969), “Organisational or frictional equilibria, X-efficiency, and the rate of innovation”, The Quarterly Journal of Economics, pp. 600-623.
Levitas, E. and McFadyen, M. (2009), “Managing liquidity in research‐intensive firms: signalling and cash flow effects of patents and alliance activities”, Strategic Management Journal, Vol. 30, Issue 6, pp. 659-678.
Lewis, T. (2013), A review and analysis of the effects of financial slack on firm innovation, Doctoral dissertation, The University of Wisconsin-Milwaukee.
Mansfield, E. (1972), Research and innovation in the modern corporation, Springer.
Miller, K. D. and Chen, W. R. (2004), “Variable organisational risk preferences: Tests of the March-Shapira model”, Academy of Management Journal, Vol. 47, Issue 1, pp. 105-115.
Mishina, Y.; Pollock, T. G. and Porac, J. F. (2004), “Are more resources always better for growth? Resource stickiness in the market and product expansion”, Strategic Management Journal, Vol. 25, Issue 12, pp. 1179-1197.
Moch, M. K. and Pondy, L. R. (1977), Ambiguity and choice in organisations, March, JG and Olsen, JP.
Modigliani, F. and Miller, M. H. (1958), “The cost of capital, corporation finance and the theory of investment”, The American Economic Review, Vol. 48, Issue 3, pp. 261-297.
Moulton, B. R. (1986), “Random group effects and the precision of regression estimates”, Journal of Econometrics, Vol. 32, Issue 3, pp. 385-397.
Moulton, B. R. (1987), “Diagnostics for group effects in regression analysis”, Journal of Business & Economic Statistics, Vol. 5, Issue 2, pp. 275-282.
Myers, S. C. (1984), “The capital structure puzzle”, The Journal of Finance, Vol. 39, Issue 3, pp. 574-592.
Nohria, N. and Gulati, R. (1996), “Is slack good or bad for innovation?”, Academy of Management Journal, Vol. 39, Issue 5, pp. 1245-1264.
O'brien, J. P. (2003), “The capital structure implications of pursuing a strategy of innovation”, Strategic Management Journal, Vol. 24, Issue 5, pp. 415-431.
Penrose, E. (1959), The theory of the growth of the firm, Oxford: Oxford University Press.
Shahzad, A. M.; Mousa, F. T. and Sharfman, M. P. (2016), “The implications of slack heterogeneity for the slack-resources and corporate social performance relationship”, Journal of Business Research, Vol. 69, Issue 12, pp. 5964-5971.
Su, Z., Xie, E. and Li, Y. (2009), “Organisational slack and firm performance during institutional transitions”, Asia Pacific Journal of Management, Vol. 26, Issue 1, pp. 75-91.
Tan, J. and Peng, M. W. (2003), “Organisational slack and firm performance during economic transitions: Two studies from an emerging economy”, Strategic Management Journal, Vol. 24, Issue 13, pp. 1249-1263.
Thompson, J. D. (1967), Organisations in action: Social science bases of administrative theory, Transaction Publishers.
Vanacker, T.; Collewaert, V. and Paeleman, I. (2013), “The relationship between slack resources and the performance of entrepreneurial firms: The role of venture capital and angel investors”, Journal of Management Studies, Vol. 50, Issue 6, pp. 1070-1096.
Voss, G. B.; Sirdeshmukh, D. and Voss, Z. G. (2008), “The effects of slack resources and environmental threat on product exploration and exploitation”, Academy of Management Journal, Vol. 51, Issue 1, pp. 147-164.