The Effect Of Financial Slack On Firm Performance In Different Organizatonal Environment

Financial slack has long been paid much attention from scholars home andabroad, among which the relationship between financial slack and enterpriseperformance is always a hot topic in operations management. In agency theory, slackis just viewed as unnecessary costs to firms and brings the agency problem. On thecontrary, in the organization theory, the slack is regarded as a cushion to cope with thepressure brought about by the changes in both the internal and external environmentsand it considerably promotes the innovations of corporations. The perspectives ofagency theory and organization theory on the role of financial slack play a dominantrole in the previous studies. However, recently some empirical studies conducted bysome scholars believe that financial slack and enterprise performance doesn’t exhibita simple linear relationship, but a complex non-linear relationship, such as Ushaped relationship or inverted U shaped relationship.Nowadays, the researches on financial slack mainly focused on the effect thelevel of financial slack imposed on firm performance, few studies were found toinvestigate the impact of the structure of the financial slack and the contingency roleof organizational environment plays in the relation between financial slack andenterprise performance. Therefore, following the previous studies and taking themanufacturing industry as the research subject, this paper explores the relationshipbetween the structure of financial slack and firm performance as well as thecontingency role of organizational environment in the relationships between the leveland the structure of financial slack and firm performance.At first, the related researches on financial slack are comprehensively reviewedin this paper; the definition and classification of financial slack along with therelationship between financial slack and firm performance are summarized. Then onthe basis of relevant theoretical knowledge, hypotheses of the impact of financialslack on firm performance in different organizational environments are proposed.Finally, based on the design of the study variables and the establishment of somepanel regression models, an empirical analysis is conducted on the relationshipbetween financial slack and firm performance in different organizationalenvironments. The research results show that the relationships between the level andthe structure of financial slack and firm performance both show to be the invertedU-shaped, whereas environmental dynamism and environmental munificence have significant negative moderating effect s on the relationship between the level offinancial slack and firm performance. With respect to the structure of financial slack,environmental dynamism have a significant negative moderating effect on therelationship between the structure of financial slack and firm performance, whileenvironmental munificence doesn’t have a significant role. In the two-dimensionalorganizational environment, the inverted U-shaped curves between the level and thestructure of financial slack and firm performance are steepest when the environment isboth low dynamic and low munificent, and are flattest when the environment is highdynamic but low munificent.