Slack, firm Performance and the institutional context: Evidence from 31 European countries

Abstract

This study examines a long-standing debate in the strategy literature on the effect of a firm’s slack resources on its financial performance. Using longitudinal data from 174,042 European firms in 56 industries and 31 countries, we adopt an institutional perspective to propose that a country’s formal institutions, particularly legal frameworks, regulate firms’ deployment of slack resources. Specifically, we explore the effects of creditor and employee rights on the performance consequences of slack resources, highlighting the regulative pillar of institutions. We find that financial slack enhances firm performance at diminishing rates whereas human resource (HR) slack reduces performance at diminishing rates. Financial slack also has a more positive effect on firm performance in countries with weaker creditor rights, whereas HR slack has a more negative effect on performance in countries with stronger employee rights. The results provide a richer view of the relationship between slack resources and firm performance than widely assumed in the literature.