The performance implications of financial slack during economic recession and recovery: observations from the software industry (2001-2003) *

In this article, we examine the role financial slack plays in a particularly hostile environment: economic recession. We employ competing theoretical views on the function of financial slack to examine its relationship to firm performance in a population of firms facing extreme resource scarcity. Using econometric data from 450 software firms from 2001 to 2003, we find that higher levels of financial slack are detrimental at the onset of a recession but can accelerate recovery. Our results suggest that financial slack, as a discretionary tool for managers, can be manipulated both to speed strategic reaction to environmental shifts and to favorably position firms for eventual economic rebound.
Much has been written in the strategic management literature on whether slack resources help or hinder the successful management of the firm (e.g., O'Brien, 2003; Cheng and Kesner, 1997; Nohria [...]