Slack Resources, Corporate Performance, and COVID-19 Pandemic: Evidence from China

Abstract

COVID-19 has caused tremendous damage to global economies, and similar health crises are expected to happen again. This study tests whether slack resources would enable companies to prepare for such uncertainties. Specifically, we explored the influence of the COVID-19 patient occurrence on corporate financial performance and the buffering effect of financial slacks using Chinese listed companies’ data during 2021. We also examined whether this effect differs across firms’ financial health and industry. Test results are as follows. First, consistent with the recent studies on pandemics, the degree of COVID-19 prevalence had a negative impact on the Chinese company’s financial performance, and slack resources offset this adverse effect. Second, slack’s buffering effects appeared mostly in financially constrained companies. Third, such effects mostly appeared in industries vulnerable to the COVID-19 shock. In the business environment of 2021, adapted to COVID-19, our main test result seems to mainly come from companies with a greater need for slack. Our tests imply that, despite differences in the degree of accessibility to resources, excess resources help companies overcome the COVID-19 crisis, which means that firms can more efficiently respond to economic shocks such as COVID-19 if they reserve past profits as free resources. This study contributes to the literature in that there is limited research on the slack resources’ buffering effect on the COVID-19 shock and that this study works as a robustness test as it uses data from one of the East Asian regions at a time when the control of COVID-19 was relatively consistent and successful, which can limit the effect of COVID-19 and slacks.

Post-Crisis Sustainable Performance of Manufacturing SMEs: The Roles of Positive Orientation, Financial Slack, and External Networks

“…They argue that high levels of slack lead to inefficient investment decisions and generate opportunity costs which add rigidity to a firm [33,44]. This is supported by some studies, which show an inversed U-shape relationship between slack and corporate outcomes such as innovation or financial performance [42]. As our study focuses on manufacturing SMEs which are generally regarded as not resource-rich, this curvilinear relationship should not be a concern.…”

“…There is a substantial amount of research related to the importance of slack, including the seminal papers by Bourgeois [38], Nohria and Gulati [39], and Singh [40]. Buffering and facilitating are frequently cited in the literature as the important roles of slack in times of crisis [41][42][43]. As Lefebvre succinctly states, "slack resources serve the functions of stabilizing and adapting that help firms deal with external shocks and explore additional, riskier business opportunities .…”

Capital Structure and Firm Performance for Non-Financial Saudi Firms: COVID-19 Crisis

“…Zhang & Zhang (2021) showed that a higher number of COVID-19 cases significantly decreased profitability in 107 countries. Moreover, Jin et al (2022) confirmed that over the period of COVID-19 spread (2020), the profitability of Chinese-listed firms was significantly and inversely affected.…”

The Relevance of Sectoral Clustering in Corporate Debt Policy: The Case Study of Slovak Enterprises

“…Through methods and techniques of financial analysis, financial performance describes the achieved corporate financial health (Durica et al 2023;Kaczmarek et al 2021). According to Hedija and Nemec (2021), Jin et al (2022), andKayani et al (2023), data collected through financial performance evaluations have significant explanatory power. Many authors employ intricately constructed systems of indicators or constructed models that are separated into several parts to evaluate the performance of firms (e.g., in terms of labor productivity growth-Lăzăroiu and Rogalska 2023, of deliberate managerial strategy- Vătămănescu et al 2020, andof organizational achievements-Vătămănescu et al 2023) with the intention of introducing a more detailed comprehension of the achieved corporate performance.…”