Options
Financial Slack and Firm Performance during Economic Downturn : In: Spotlight Session, 2015. Eurpean Business and Management Conference (EBMC) 2015
Type
conference paper
Date Issued
2015-07-25
Author(s)
Raastad, Ingeborg
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 are measured over a time period of four years prior to the crisis. Financial performance is 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.
Language
English
Keywords
financial slack
financial flexibility
capital structure
economic downturn
financial performance
external Shocks
economic crisis
available slack
potential slack
absorbed slack
linear Performance effects
curvilinear Performance effects
HSG Classification
contribution to scientific community
HSG Profile Area
SoM - Responsible Corporate Competitiveness (RoCC)
Refereed
No
Book title
The European Business and Management Conference Proceedings 2015
Event Title
The European Business and Management Conference 2015 Proceedings (1-15)
Event Location
Brighton, UK
Subject(s)
Division(s)
Eprints ID
242722