Regarding same manner (Nohria and Gulati, 1997) though,
Regarding its relationship with performance different components of slack has been treated in the same manner (Nohria and Gulati, 1997) though, different views exist about the paybacks of slack (Geoffrey Love and Nohria, 2005). For instance, some empirical studies documented a positive slack-performance nexus (Vanacker et al., 2013, Cyert and March, 1963, Bradley et al.
, 2011, Marlin and Geiger, 2015) while others predicted negative nexus (Jensen, 1986, Picolo et al., 2017, Shahzad et al., 2016, Argilés-Bosch et al., 2016) and curve-linear (George, 2005, Tan, 2003, Tan and Peng, 2003, Kim et al., 2008, Wiersma, 2017a, Wiersma, 2017b, Danneels, 2008). Organizational theorists argue that slack resources can help the organization in the externalization of opportunities (Penrose, 2009), safeguard the firms from the environmental crisis (Thompson, 1967) and upsurge a firm’s strategic decisions (Ma et al., 2012).
Therefore, slack is necessary to help ensure the long-run survival of the organization. According to organizational theory, slack has been used to perform four major functions. First, slack acts as an incentive, which indicates payment to members of the alliance in excess of what is required to maintain the firm (Cyert and March, 1963). Second, slack can become a resource for conflict resolution. The assumption is that, with adequate slack, there can be a solution for every problem. Third, slack may be employed as a buffer, which insulates the technique core of the firm from environmental turmoil. Fourth, slack can facilitate the strategic behavior, that enables the organization to test with new strategies such as introducing new products and entering new markets (Thompson and Levine, 1997).
Especially during the turmoil, slack allows the organization to hang in there (Sharfman et al., 1988). To be sure, organizational theorists confess that ‘slack resources are extra costs to the firm’ and that too much slack is incapable (Galbraith, 2007).
However, organizational theorists generally believe that, given the complex trade-offs, the benefits of slack offset its costs, and that a zero-slack organization is not realistic. Hence, organizational theorists suggest that, before reaching an excessive level, slack resources have a favorable impact on firm’s performance. The organizational theory has been supported by the result of several prior empirical studies (Bradley et al., 2011, Vanacker et al., 2013, Marlin and Geiger, 2015, Argilés-Bosch et al., 2016, Picolo et al., 2017).
Thus, given the arguments of organizational theory and the results of prior empirical studies, the following hypothesis is offered:Hypothesis 1: Financial slacks have a positive association with firm’s performance.By painting a completely dissimilar picture of the benefit of slack, agency theory turns the organizational theory viewpoint ‘upside down’ (Davis and Stout, 1992). Agency theory castoffs the viewpoint of organizational theory that the organization is an organism with human-like properties such as interest in survival. Contrarily, the firm is not an individual but is a legal entity that serves as a focus for multiple procedures in which the conflicting objectives of individuals are carried into steadiness within a framework of contractual relations (Jensen and Meckling, 1976). Basically, this viewpoint concerns the firm as a nexus of contracts among principals and agents (Fama, 1980). Agency theorists argued that maintaining slack can be good for the firm; rather, it will only be good for executives acting as agents (Jensen and Meckling, 1976). Since executives integrally have a set of goals such as the chase of power, respect, money, and job securities, that are not always aligned with the interests of principals, executives may use slack to involve in excessive diversification, empire-building, and on the job shirking.
Thus, slack may become a source of agency problems, that breed inefficiency also called x-inefficiency which means ‘the variation between the efficient behavior of business assumed by economic theory and their observed behavior in practice caused by a lack of competitive pressure’ (Leibenstein, 1969). The view of agency theory has been empirically supported by prior studies (Tan and Peng, 2003, Shahzad et al., 2016, Lee and Wu, 2016). Based the arguments of agency theory and results of prior empirical studies, we proposed the following hypothesis:Hypothesis 2: Financial slacks have a negative association with firm’s performance.
The financial slack-performance linkage may also be influenced by some other factors. It has been argued that institutional development might have strong mediation effect on the slack-performance nexus. The pecking order theory suggested that firms prefer to use their internal source of finance in financing their investment projects as a result of the existence of asymmetric information in the credit market.
We also argued that the preference of firms to use internal sources of finance, for financing investment projects is dependent on the institutional development which can provide external sources of finances in the form of debt and or equity. For instance, in countries where the banking sector and stock market are well-developed, firms can easily have external sources of finance and can support their investment with it and can have more financial slack in the form of more retained earnings. It is inversely true for firms in countries where there are poor institutional developments. Generally in Africa, the rate of development of banking sector and stock markets has been low compared to developed countries, however, there still exists relative differences of such institutional developments in African countries that really have an influence on the slack-performance nexus. For instance, Pera (2014) reviewed banking sectors in Sub-Saharan Africa and reported that, as the banking sector continues in a strong growth cycle, the need for formal financial services usually rises in tandem, and so does the ratio of bank assets to GDP.
Similarly, Ngare et al. (2014) investigated stock market development and economic growth in Africa and their study found that stock market development has a positive effect on investment, that is the development of stock market is crucial in supporting external finance provision for firms and have an indirect effect of accumulation of internal sources of finance in the form of slack. We computed the average bank deposit to GDP% and stock market capitalization to GDP% of Asia, Europe, and Africa from 2006 to 2014 for the purpose of comparing African banking sector and stock market development with the stated continents. We also used the world average bank deposit to GDP% and Stock market capitalization to GDP% as a baseline of comparison between the stated continents. Figure 1 presents the average bank deposit to GDP% and stock market capitalization to GDP% of Asia, Europe, Africa and the World. The average bank deposit to GDP% is found to be the highest in Europe which is 72.228 followed by Asia which is 56.
096 and the world average bank deposit to GDP% from the year 2006 to 2014 is 41.931. The average bank deposit to GDP% of Africa is found to be the lowest (30.
825) from Europe, Asia and the world indicating that the banking sector development in Africa is in its infant stage. On average, Asian stock market is found to be relatively better with an average Stock market capitalization to GDP% of 59.567 followed by European stock market with an average Stock market capitalization to GDP% of 55.558. Africa is still in the bottom by its stock market development compared with Asia and Europe.
However, on average, African stock market development, compared with the world’s average is found to be better with Stock market capitalization to GDP% of 47.392. The world’s average stock market to GDP % is 39.493.
This shows that the stock market of Africa is in the initial stage of development but it is considered to be promising in the future. According to Demirgüç-Kunt and Levine (1996), Demirgüç-Kunt and Maksimovic (1996a) and Demirgüç-Kunt and Maksimovic (1996b), initial improvements in the functioning of a developing stock market produce a higher debt-equity ratio for firms and stock markets offer entrepreneurs with liquidity and with opportunities to diversify their portfolios. Demirgüç-Kunt and Maksimovic (1996b) found that a significant positive relationship between bank development and Debt-Equity and a negative but insignificant relationship between stock market development and Debt-Equity ratio, and they suggested that in countries with developing the financial system, the stock market and banks play different but yet complementary roles. Based on the result founded by (Demirgüç-Kunt and Maksimovic, 1996b), we develop the following hypothesis.