Organizational slack in declining firms and surviving firms

Abstract

Purpose – There is a preponderance of evidence in the established literature that declining firms have lower levels of organizational slack when compared with surviving firms. To further advance the current literature, the purpose of this paper is to examine whether or not organizational slack in its various forms differ in declining firms and in surviving firms. Additionally, this study examines whether there is a change in the extent of slack in the declining firms in the years immediately preceding bankruptcy filing. Design/methodology/approach –t-tests and panel regressions with random effects are performed. Findings – Available slack, potential slack and total slack of bankrupts significantly differ from that of survivors in each year. However, recoverable slack levels do not differ in bankrupts and survivors. Available slack of bankrupts reduces significantly over the last five years before bankruptcy. Recoverable slack, potential slack and total slack conditions do not drastically deteriorate for the bankrupts over the last few years prior to bankruptcy. Research limitations/implications – Not confirming to prior evidences, the results of this study suggest that not every type of organizational slack is in a worse condition within a declining firm than in a surviving firm. Practical implications – Among all the slack types, what differentiates bankrupts from survivors is the amount of available slack. Decreasing available slack within declining firms should forewarn managers of further likely deteriorations. Originality/value – The results of this study questions the prevailing wisdom that financial resource levels, especially the levels of organizational slack is in a significantly lower level in declining firms than in surviving firms.

Resource orchestration in a context of organizational decline

“…This adaptive ability is frequently linked to the concept of organizational slack, defined as “the pool of resources in an organization that is in excess of the minimum necessary to produce a given level of organizational output” (Nohria and Gulati, 1997, p. 32). Moreover, prior studies have found evidence of less organizational slack in declining firms that went bankrupt that in surviving firms (Guha, 2016; Singh, 1986).…”

Effects of unexpected financial slack on SMEs’ diversification and growth: evidence from China

“…Mishina et al (2004) reported that when firms pursued growth through product expansion, financial slack was positively related to firms’ short-term growth, whereas human resources slack negatively moderated this relationship. Results of other empirical studies also showed that slack with different levels of managerial discretion produced different roles on performance (Marlin and Geiger, 2015; Mousa et al , 2013; Xu et al , 2015; Guha, 2016). Moreover, Paeleman and Vanacker’s study (2015) suggested that neither too much discretion over resources (managers have discretion over both financial and human resources) nor too limited discretion over resources (managers have constraints on both financial and human resources) are optimal for firm performance and survival.…”

“…All over-financed SMEs were instructed by the regulatory authority to use the over-financed capital raised through IPO in their main business areas and to report the usage in their annual reports. In fact, recent studies have reported that slack with different levels of managerial discretion produced divergent role on performance (Marlin and Geiger, 2015; Mousa et al , 2013; Guha, 2016). Unabsorbed slack (higher discretion) was found positively contribute to firms’ product innovation (Liu et al , 2012) and corporate social performance (Xu et al , 2015), whereas absorbed slack (lower discretion) had either lower positive or negative effects.…”

“…Recent research efforts extended the exploration of slack toward two broad directions. One inquire line further differentiated slack resources with different levels of managerial discretion, and correspondingly explored the direct and contingent effect that slack with different managerial discretion generated on performance (Mishina et al , 2004; Jin et al , 2015; Dasi et al , 2015; Wang et al , 2016; Tyler and Caner, 2016; Liu et al , 2014; Mishina et al , 2004; Marlin and Geiger, 2015; Mousa et al , 2013; Xu et al , 2015; Guha, 2016). Another inquiry line extended the dimension of classifying slack from managerial discretion to expectancy , and found that slack resources that formed unexpectedly had negative effects on performance (Natividad, 2013).…”

Sucesso E Fracasso Organizacional Na Indústria De Aviação Comercial Americana: Estudo Comparativo Das Companhias Aéreas Delta Airlines E Eastern Airlines

“…Algumas empresas conseguem se reorganizar com sucesso durante o declínio e continuar a atuar (Guha, 2016) e essa é outra perspectiva de estudo do tema sucesso e fracasso, a recuperação organizacional (turnaround) e as estratégias usadas para melhorar o desempenho da empresa em uma ampla gama de condições (Josefy et al, 2017). Pajunen (2005) afirma que o declínio é a primeira etapa de um processo de recuperação.…”