Financial Slack and Firm Performance during Economic Downturn

Item Type Journal paper
Abstract This paper examines whether financial slack has an impact on performance in the particularly hostile environment of an economic downturn. Organizational theory posits that the impact of high levels of slack on performance should be positive during such a time, as excess resources buffer the core of the firm from external shocks. Using the most recent economic downturn in Germany, the paper investigates whether firms that built up excess resources up until the onset of the crisis experience superior performance during the downturn. Financial slack is measured along the following dimensions: The proportion of current assets to current liabilities, the ratio of equity to total debt, and the ratio of general and administrative expenses to sales (SG&A). These proxies were measured over a period of four years prior to the crisis. Financial performance was then evaluated over the duration of the downturn. The results show that high pre-crisis levels of liquidity do not impact performance during a crisis. However, the findings support the view that high pre-crisis levels of debt have a negative impact on firm performance during the latest economic downturn. For slack stemming from the ratio of SG&A to sales, the association with performance was found to be positive, albeit at a declining rate. Both findings support the hypothesis that financial slack has value during an economic downturn. The originality of the approach lies in the evaluation of both linear and curvilinear performance effects of financial slack for German firms during an economic downturn.
Authors Grüner, Andreas & Raastad, Ingeborg
Journal or Publication Title GSL Journal of Business Management and Administration Affairs
Language English
Keywords Financial flexibility, Financial slack, Economic crisis, Capital structure
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SOF - System-wide Risk in the Financial System
Refereed Yes
Date 30 April 2018
Volume 2
Number 1
Page Range 1-7
Number of Pages 7
Official URL
Depositing User Prof. Dr. Andreas Grüner
Date Deposited 27 Apr 2018 16:28
Last Modified 08 Aug 2018 11:16


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Grüner, Andreas & Raastad, Ingeborg (2018) Financial Slack and Firm Performance during Economic Downturn. GSL Journal of Business Management and Administration Affairs, 2 (1). 1-7.

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