Slack resources, firm performance, and the institutional context: Evidence from privately held European firms
| Author | Shaker A. Zahra,Veroniek Collewaert,Tom Vanacker |
| Published date | 01 June 2017 |
| DOI | http://doi.org/10.1002/smj.2583 |
| Date | 01 June 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 1305–1326 (2017)
Published online EarlyView 26 October 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2583
Received 12 April 2015;Final revision received5 July 2016
SLACK RESOURCES, FIRM PERFORMANCE, AND THE
INSTITUTIONAL CONTEXT: EVIDENCE FROM
PRIVATELY HELD EUROPEAN FIRMS
TOM VANACKER,1,*VERONIEK COLLEWAERT,2,3and SHAKER A. ZAHRA4
1Faculty of Economics and Business Administration, Ghent University, Gent,
Belgium
2Area Entrepreneurship, Governance and Strategy, Vlerick Business School, Gent,
Belgium
3Department of Managerial Economics, Strategy and Innovation, Katholieke
Universiteit Leuven, Leuven, Belgium
4Carlson School of Management, University of Minnesota, Minneapolis, Minnesota,
U.S.A.
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.Specically, we explore the moderating effects of creditor and employee rights on
the performance effects of slack. Using longitudinal data from 162,633 Europeanprivate rms in
26 countries, we nd that nancial slack enhances rm performance at diminishing rates, whereas
human resource(HR) slack lowers performance at diminishing rates. However, nancial slack has
a more positive effect on rm 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 providea richer view of the relationship between slack and rm 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 rms from internal and external shocks and
to pursue new opportunities or whether,on the other hand, they should develop “lean” rms. Our
study suggests that excess cash resources—which are usually viewed as easy to redeploy— benet
rm performance, especially when rms operate in countries with weaker creditorrights. However,
excess human resources—which are usually viewed as more difcult to redeploy—hamper
rm performance, particularly when rms 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.
Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
Slack— the pool of resources in an organiza-
tion that is in excess of the minimum necessary
Keywords: slack resources; performance; creditor rights;
employee rights; private rms
*Correspondence to: Tom Vanacker. Faculty of Economics and
Business Administration, Ghent University, Sint-Pietersplein 7,
9000 Gent, Belgium. E-mail: TomR.Vanacker@UGent.be
Copyright © 2016 John Wiley & Sons, Ltd.
to sustain routine operations— is a central
concept in a behavioral theory of the rm (Argote
and Greve, 2007; Bromiley, 2005; Cyert and
March, 1963). How managers use slack and slack’s
performance effects have long been debated in the
strategy literature (e.g., Bourgeois, 1981; Bradley
et al., 2011a; Bradley, Shepherd, and Wiklund,
2011b, 2011c; Bromiley, 1991; George, 2005;
Kim and Bettis, 2014; Lecuona and Reitzig, 2014;
1306 T. Vanacker, V. Collewaert, and S. A. Zahra
Mousa and Reed, 2013; Natividad, 2013; Tan
and Peng, 2003; Wiseman and Bromiley, 1996).
Managers can use slack to stabilize their rms’ core
activities and foster strategic behavior that creates
value (Cyert and March, 1963; Thompson, 1967).
Alternatively, managers can also use slack for inef-
cient and value-destroying purposes (Jensen and
Meckling, 1976; Leibenstein, 1966; Williamson,
1963). Empirical research has been similarly
equivocal about the performance effects of slack,
even when considering the existence of distinct
types of slack resources (e.g., unabsorbed versus
absorbed) and their differential redeployability.
Prior conicting ndings may stem from
researchers’ lack of attention to the environment in
which managers allocate and use slack resources.
Yet, as Gavetti et al. (2012: 24) note, “the environ-
mental inuence on [managers’] goals appears to
be stronger now than when Cyert and March (1963)
was written.” Conceptually, this environment is
broader than the rm’s industry. It also includes for
instance the cultural, economic, legal, and political
institutions that inuence how managers make
decisions on the deployment and use of resources
(North, 1990). Most prior studies, however, have
examined individual countries, without examining
their institutional environments, which are crucial
to explaining managerial behavior (Meyer and
Rowan, 1977; Oliver, 1991). Likewise, existing
research has ignored cross-country differences that
impinge on managers’ motivation and discretion as
they allocate and use resources (e.g., Crossland and
Hambrick, 2011; Wu and Tihanyi, 2013). However,
legal frameworks in particular vary signicantly
across countries in the extent to which they protect
different stakeholders, placing limits on managers’
discretion in allocating and using their rms’
resources as they attempt to meet the expectations
of their stakeholders (Schneper and Guillén, 2004).
These differences suggest a need to empirically
examine the effect of variations in the institutional
environment on managers’ use of slack resources
and the performance effects of these resources
across countries.
To this end, we integrate the behavioral per-
spective (e.g., Cyert and March, 1963) with the
neo-institutional perspective (e.g., DiMaggio and
Powell, 1983; Meyer and Rowan,1977). The behav-
ioral perspective focuses on the allocation of slack
within rms. It suggests that slack plays a posi-
tive stabilizing and adaptivefunction, and thus, con-
tributes to rm performance, although too much
slack also has its costs and can lower performance
(Bromiley, 2005). Examining whether and how
stakeholders’ powers, as enshrined in national laws,
moderate the slack-performance relationship allows
us to determine the efcacy of institutional theory
in explaining differences found in this relationship
for rms operating in different countries.1Thus,
we propose and test the argument that the rela-
tionship between a rm’s slack resources and its
performance is moderated by country-level institu-
tions. This focus recognizes the need to consider the
rm’s broader external environment when study-
ing slack resources, as suggested in the literature
(Bradley et al., 2011b; George, 2005; Lecuona and
Reitzig, 2014). Still, this literature has tended to
equate a rm’s external environment with its indus-
try (see Capron and Guillén, 2009; Crossland and
Hambrick, 2007, for a similar observation in the
broader strategy literature), ignoring the broader
institutional setting, which provides the framework
that managers use in making resource allocation
decisions.
We focus on the performance effects of nan-
cial and HR slack in privately held rms. Though
prior empirical studies have primarily focused on
the performance effects of nancial slack (e.g.,
Bradley et al., 2011b; George, 2005), it is impor-
tant to test a behavioral perspective on a broader set
of slack resources— including those slack resources
(such as HR slack) that have been less rigorously
investigated— to determine its generalizability. A
priori, the differential performance effects of dis-
tinct slack resources are unclear (Tan and Peng,
2003). However, behavioral theorists have noted
that “slack should not be considered in a generic
sense” (Wiseman and Bromiley, 1996: 539). Indeed,
nancial resources are managed differently from
human resources. For instance, these resources are
different in terms of their divisibility and fungibility,
and hence, their stickiness (Mishina, Pollock, and
Porac, 2004). Such differences could affect the abil-
ity of managers to (re)deploy these resources (Bour-
geois and Singh, 1983; Wang etal., 2016). In addi-
tion, different national institutions are more (or less)
likely to affect managers’ (re)deployment of distinct
1The absolute level of a given resource a rm has could depend
on the national institutional framework in which it operates.
However, we look at slack resources availablein a rm adjusted
for industry and country norms. This implies that the level of
slack is not dependent on the country-level institutions or any
country-level variable.
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1305–1326 (2017)
DOI: 10.1002/smj
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