Research summary: Integrating the behavioral and institutional perspectives, we propose that a country's formal institutions, particularly its legal frameworks, affect managers' deployment of slack resources. Specifically, we explore the moderating effects of creditor and employee rights on the performance effects of slack. Using longitudinal data from 162,633 European private firms in 26 countries, we find that financial slack enhances firm performance at diminishing rates, whereas human resource (HR) slack lowers performance at diminishing rates. However, financial slack 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 and firm performance than currently assumed in the literature. Managerial summary: A key dilemma managers often encounter is whether, on the one hand, they should build in excess resources to buffer their firms from internal and external shocks and to pursue new opportunities or whether, on the other hand, they should develop “lean” firms. Our study suggests that excess cash resources—which are usually viewed as easy to redeploy—benefit firm performance, especially when firms operate in countries with weaker creditor rights. However, excess human resources—which are usually viewed as more difficult to redeploy—hamper firm performance, particularly when firms operate in countries with stronger labor protection laws. Thus, the management of slack resources critically depends on the characteristics of these resources (e.g., redeployability) and the institutional context in which managers operate.
Bibliographical noteFunding Information:
We thank Philip Bromiley, Gurneeta Vasudeva as well as two anonymous SMJ reviewers, among others, for constructive feedback. The article further benefited from presentations at the 2015 Academy of Management Meeting (Vancouver), Ghent University, and KU Leuven. We acknowledge financial support from the Research Foundation?Flanders (V408814N), the National Bank of Belgium (BOF13/STA/016), and the Hercules Foundation (AUGE/11/13).
- creditor rights
- employee rights
- private firms
- slack resources