A bird in the hand is better than two in the bush: Investigating the relationship between financial slack and profitability in business groups

Abstract

Using arguments from the behavioral theory of the firm, agency theory, and the literature on internal capital markets, this article investigates the relationship between financial slack and firms’ profitability in standalone versus business group–affiliated firms. Using a large sample of French privately held firms, we show that there is a quadratic, inverse U-shape relationship between financial slack and profitability for privately held firms. We observe that the relation is steeper for business group affiliated firms than for standalone firms, which is consistent with the idea that firms in business groups are in competition for the business groups resources. Moreover, we explore whether business groups characteristics and position and weight of a given affiliated firm in the business group organization influence the impact of financial slack on profitability. Our results show that for firms that are closest to the business group head firm and that have a higher weight in the business groups, the quadratic, inverse U-shaped relationship is steeper. These findings suggest that the bargaining power that firms have in business groups plays an important role in explaining the relation between financial slack and profitability. JEL CLASSIFICATION: G32, L22 and L25.

Human resources slack and profitability: SMEs, large firms, and the role of business group affiliation

“…Organizational structures represent an essential driver of the resource-performance relationship. Being affiliated with a BG reduces the need to hold resources (Locorotondo et al, 2014 ) and the impact of resources on performance (Belenzon & Tsolmon, 2016 ; Lefebvre, 2021 ). The ability of BG and other comparable organizations (like conglomerates) to dynamically allocate and reallocate resources should thus more systematically be taken into consideration in resource-based research (Lovallo et al, 2020 ).…”

“…Some BG firms may be more likely to hold HR slack because of their role in the BG organization. For instance, the BG head firm likely centralizes slack resources to facilitate their allocation across affiliated firms (Lefebvre 2021 ). Future research could investigate the factors on which the repartition of slack resources in BG depends, like the attention capability of BG head firms (Belenzon et al, 2019 ).…”

“…Although research on the role of slack resources is vast, not all forms of slack have been equally considered. Most papers on slack have focused on the role of cash or financial slack (Bradley, Shepherd & Wiklund, 2011a , Bradley, Wiklund & Shepherd, 2011b ; Carnes et al, 2019 ; Lefebvre, 2021 ). More recently, scholars have considered other forms of slack, such as human resources (HR) slack (Paeleman & Vanacker, 2015 ; Vanacker et al, 2017 ).…”

“…Less attention has been given to the fact that firms are not homogeneous in their internal organization. To be clear about the positioning of this study, we acknowledge that the literature has explored the relationship between financial slack and performance in the context of SMEs (e.g., Bradley et al, 2011a ; La Rocca et al, 2019 ; Lefebvre, 2021 ). However, to the best of our knowledge, previous studies have not considered whether the magnitude (or nature) of the relationship between HR slack and profitability changes depending on the organization’s size or complexity, which is the purpose of this paper.…”

Dynamic resource management and slack resources

“…The age and family character of the firm and the size of the firm in terms of the number of employees (George, 2005). The inclusion of the size of the firm, in terms of the number of employees and the age of the firm, is justified because larger and older firms exhibit varying degrees of resource slack (Lefebvre, 2021;Elbanna, 2012). The inclusion of the family character variable is warranted due to the unique characteristics of family firms, which enable them to effectively utilise their slack resources in pursuit of substantial growth (Minola et al, 2022).…”