2021 International Conference on Public Management and Intelligent Society (PMIS)

Financial Slack, Operational Slack and Firm

Performance during Episodes of Financial Crises:
A Panel Data Analysis
2021 International Conference on Public Management and Intelligent Society (PMIS) | 978-1-6654-3872-8/21/$31.00 ©2021 IEEE | DOI: 10.1109/PMIS52742.2021.00039

Shun-Ho Chu Yueming Ren*

School of Business School of Business
Macau University of Science and Technology Macau University of Science and Technology
Macau, China Macau, China
shchu@must.edu.mo yuemingren@outlook.com

Huimin Cai Yu Xu
School of Business School of Business
Macau University of Science and Technology Macau University of Science and Technology
Macau, China Macau, China
2942749840@qq.com 975819411@qq.com

Siyuan Bao
School of Business
Macau University of Science and Technology
Macau, China
baosiyuan9@163.com

Abstract—Under the unstable environments, firms should have Real estate industry is one of leading industries with high-
well-prepared slack resources to meet future investment
opportunities, and cushion impacts of changing external
level contribution to GDP. Also, the industry has substantially
environments, especially financial crises. The study tries to been impacted by volatility of macroeconomic conditions. The
investigate the effect of financial slack and operational slack on real estate industry required to kee p slack resources as a buffer
firm performance (ROA) by using samples of 125 listed real estate to cushion negative impact of uncertain environments. On the
companiesįį The study also examines the moderating effect of other hand, real estate industry needs more resources to support
episodes of financial crises on relationship between slack resources the future investment opportunities.
and ROA. The empirical results of the study show that financial
The previous studies have empirically examined the
slack has U-shape relationship with ROA, whereas operational
slack has no relationship with ROA. Secondly, the subprime relationship between slack resources and firm performance.
financial crisis of 2008-2009 causes inhibiting effect on relationship However few studies consider episodes of the financial crises.
between of financial slack and ROA, while the crisis causes To remedy the research gap, the study tries to investigate the
facilitating effect of operational slack and ROA. In addition, the effect of financial slack and operational slack on firm
European debts crisis causes facilitating effect on relationship performance. Furthermore, the study also examines the
between financial slack and ROA. relationship between slack resources and firm performance
Keywords—Financial Slack; Operational Slack; Financial during episodes of financial crises.
Crisis The study is organized in five sections. The first section is
introduction. The second section of the study describes the
I. INTRODUCTION literature review and proposes the hypotheses. Data and
Recently a firm has paid more attention on slack resource in methodology will be in the third section. Empirical results are
operations. The main reason is that a firm has always stayed in shown in the fourth section. Final section presents conclusion.
uncertain environments. According to resource-based theory, a
manager of the firm should consider the optimal amount of II. REVIEW OF LITERATURE
resource to support the needs of investments and buffer the The resources held by a firm are the key determinants of its
variation of supply and demand in the markets. Alternatively, operational performance [2]. Slack resources are defined as
slack resources are regarded as an effective strategy to deal with excess resources available to an organization and difference
uncertain environments [1]. between total resources and total necessary payments [3]. Slack

978-1-6654-3872-8/21/$31.00 ©2021 IEEE 144

DOI 10.1109/PMIS52742.2021.00039

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resources refer to underutilized and uncommitted resources of Kovach et al. [1] find that instability has positive moderating
a firm can be easily employed to achieve operational goals [4] [5]. on between operational slack and performance. They explore
According to resource-based theory, a firm with more resources that an increase in operational slack improves performance in
than other firms has more advantage in the markets [6] [2]. unstable environments. Alternatively, unstable environments
cause that slack resources improve firm performance. Then, the
A. Financial Slack and performance study presents the following hypotheses:
Financial slack referring to the liquid assets held by a firm is H3: The episodes of financial crisis facilitate relationship
used as a buffer to cover losses from changes in the external between financial slack and firm performance.
environments and to coordinate the internal conflict of interest H4: The episodes of financial crisis facilitate relationship
[7] [8]
. In general, financial slack is a mean to manage risk and between operational slack and firm performance.
uncertainty [9]. In addition, financial slack can provide resources
to engage in the investment opportunities [10]. III. DATA AND METHODOLOGY
Empirical results of previous studies have mix effect of
financial slack on firm performance. Fonseka et al. [11] conclude A. Data and Sample
that financial slack has inverse U shape relationship on firm The annual data of the study over the period from 2005 to
performance using 11985 Chinese companies over the period 2019 are selected from CSMAR database. The samples of the
from 2000 to 2009. Lafailov [12] find the impact of financial study are 125 real estate companies listed in Shanghai and
slack on performance in case of 83 Belgium firms over the Shenzhen Stock Exchanges, and the study has totally the 1 875
period from 2003 to 2016. Agusti-Perez, Galan & Acedo [13] observations.
employ data of 449 industrial Spanish companies to find that
recoverable financial slack has negative effect on performance, B. Dependent Variables
while available and potential financial slack has positive effect
Scholars have commonly used ROA to measure the
on performance.
operational performance of firms [16] [17]. Therefore, the study
It is opportunity costs for a firm to hold slack resources selects ROA as the dependent variable to measure the
against the volatility environments, which reduces profitability performance of real estate companies. ROA is calculated as net
of the firm and eventually decreases firm performance. The profit scaled by total assets, which is:
study presents the following hypothesis:
=
ROA=
H1: financial slack has U-shape relationship with firm
performance. C. Independent Variables
B. Operational slack and firm performance The independent variables of the study include financial
slack and operational slack in the estimation regression.
Operational slack is regarded as the buffer resources to
Financial slack is measured by the level of liquid assets that is
support the operational activities of a firm and allows a firm to
accessible for an organization. Accordingly, the study utilizes
better match variation between supply and demand in the
cash and cash equivalents scaled by total assets to measure
markets [1]. Lower level of operational slack leads to a higher
financial slack [18]. Referring to the studies of Kraatz & Zajac [19]
firm performance, but a higher level of operational slack will
and Zhang et al. [18], the measurement of financial slack is as
have higher firm performance in uncertain environments [1].
follows:
Prior studies have mixed finding on relationship between
operational slack and performance. Kovach et al. [1] show that Financial slack =
operational slack has positive on performance using data of 964
firms from 1997 to 2007. Modi and Mishra [14] find that less The higher level of financial slack represents that a firm has
operational slack (more efficiency) causes an increase in more available resources for a firm to redeploy, while the firm
financial performance, but reducing slack shows diminishing having lower level of financial slack indicates that the firm has
return. According to literature researches, the study presents the less available resources.
following hypothesis: In addition, prior studies drawing from Hendricks, Singhal,
H2: Operational slack has inverse U-shape relationship with & Zhang [20], Kovach et al. [1], and Manikas & Patel [21] posit that
firm performance. operational slack represents the buffer resources available to
support the operational activities of a firm and allows firms to
C. Financial crises as moderatos better match variations between supply and demand in the
markets, so the study employs cash-to-cash cycle as a measure
With investigating effects of resource slack on firm of operational slack, which is defined as:
performance, scholars have also paid more attention on the
relationship between financial slack and firm performance by Operational slack=
aspect of when and how it affects firm performance [15].
Where the ratio between inventory and cost of goods sold is
Financial slack is used to seek stability during changes in
days of inventory outstanding
markets or financial instability, especially financial crises [15].

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(also known as days sales of inventory); days sales outstanding
represents by account receivable scaled by sales of the
organization; and the proportion between account payable and
cost of goods sold is used for measuring corporate’s payment
turnover.
(3.) Model 3:
Essentially, the ratio of operational slack represents how fast
a company can convert the invested cash from start (investment)
to end (returns). A lower ratio indicates that the business is
doing well and is effectively meeting the needs of the market
and customers.

D. Control Variables
IV. EMPIRICAL RESULTS
Referring to the previous studies, this study adds six control
variables of firm size, leverage ratio, sales growth, inventory A. Description analysis
turnover, growth rate of GDP and inflation rate into the
Table 1 indicates that characteristics of all variables. Refer to
estimation regression to control for firm-level and macro-level
dependent variable, ROA is between 6.109 and -51.298 with
heterogeneity.
high-level volatility due to industrial feature of high financial
Firm size reflects that total resources held by a firm are used leverage. FS being between 10.308 and 0.000 with mean of
to as competitive advantages, and a buffer in response to 0.143 indicates that real estate companies tends to hold not too
financial crisis. Firm size is measured by the natural logarithm much cash flows. OS shows that real estate companies have
of the total assets. Leverage ratio indicates that a firm has the quite different operational turnovers.
level of debts to total assets. Sales growth implies that a firm
Table 1 Description Analysis
has sources of income contribution for business operation.
Inventory turnover, measured by the cost of goods sold divided Var Obs. Max Min Mean Std
by a firm’s average inventory, is quite essential because it ROA 1661 6.109 -51.298 -0.005 1.276
reflects inventory converted into profit directly and capital
intensity. FS 1657 10.308 0.000 0.143 0.271
GDP expresses the performance of a country over the period OS 1569 2731.13 -292.15 0.094 124.248
of a year. Volatility of GDP will cause more drastic fluctuations SIZE 1661 28.179 14.108 10.531 1.668
in the development and investments of real estate industry. The LEV 1661 13.629 0.014 22.772 0.509
study employs GDP as the current year GDP minus the previous
year GDP, and then scaled by the previous year GDP. In addition, GRO 1647 3741.244 -0.994 0.672 96.957
inflation has a significant impact on real estate industry and is INVT 1642 1184.04 -0.004 3.766 34.265
defined as the current year CPI minus the previous year CPI, GDP 1661 0.142 0.061 3.283 0.023
and then scaled by the previous year CPI.
INF 1661 0.059 -0.007 0.088 0.016
E. Research Models
For investigating the hypotheses 1 and 2, the study constructs
a multiple linear regression model to examine the effect of B. Correlation Analysis
financial slack and operational slack on firm performance, Table 2 shows the correlation relationship of any two
controlling for six control variables: asset size, financial variables among all independent and control variables. This
leverage, growth capacity, inventory turnover, growth rate of correlation coefficients of any two variables are less than 0.7,
GDP and inflation rate, which shows as following: which indicates any one variable can individually explain
(1.) Model 1: dependent variable independently.
Table 2 Correlation Analysis
Corr. FS OS SIZE LEV GRO
FS 1.000
For investigating the hypotheses 3 and 4, the study investigating
OS -0.016 1.000
the moderating effects of subprime mortgage financial crisis of
2008-2009 and European debts crisis of 2010-2011 presents the SIZE -0.052 -0.062 1.000
following two models: LEV -0.003 0.027 -0.054 1.000
(2.) Model 2: GRO -0.012 -0.002 -0.004 -0.001 1.000
INVT 0.014 -0.011 -0.049 -0.020 -0.004
GDP 0.040 0.039 -0.531 0.009 0.005

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 INF -0.034 0.101 -0.109 0.026 -0.032 (0.001) (0.001) (0.000)
OS2 0.001 0.000
Corr. INVT GDP INF (0.000) (0.000)
INVT 1.000 D2008 -1.376***
GDP -0.016 1.000 (0.106)
INF 0.001 0.283 1.000 FS_D2008 22.554***
(0.843)
C. Hausman Test
FS2_D1008 -57.375***
The results of Hausman test are shown in Table 3. All
empirical models should adopt fixed effect models because (1.400)
their probabilities of Hausman test are less than 0.10. OS_2008 -0.025**
Table 3 Hausman Test (0.011)
Model χ2 stat degree of freedom Prob. OS2_D2008 0.001***
Model 1 143.036 10 0.000** (0.000)
Model 2 49.473 15 0.000** D2010 0.318
Model 3 151.257 15 0.000** (0.200)
FS_D2010 -3.903
D. Empirical Results
(2.417)
The empirical results of the study are shown in Table 4.
According to the empirical results of Model 1, financial slack FS2_D2010 12.954**
has U-shape relationship with firm performance, while (6.456)
operational slack has no relationship with firm performance. OS_2010 -0.001
This supports the hypothesis 1, but not supports the hypothesis
2. (0.002)
Secondly, by adding a moderator of subprime mortgage crisis OS2_D2010 0.000
of 2008-2009 in Model 2, the results of the study reveal that (0.000)
subprime mortgage crisis inhibits relationship between
SIZE 0.127*** -0.010 0.123***
financial slack and ROA, whereas subprime mortgage crisis
facilitates relationship between operational slack and ROA. (0.028) (0.019) (0.028)
This supports the hypothesis 4, but not supports the hypothesis LEV -2.046*** -0.633*** -2.049***
3.
(0.052) (0.046) (0.052)
Thirdly, by adding another moderator of European debts
GRO 0.000 0.000** 0.000
crisis of 2010-2011 in Model 3, the results of the study find that
European debts crisis facilitates relationship between financial (0.000) (0.000) (0.000)
slack and ROA, whereas European debts crisis has no effect on INVT 0.007 -0.003 0.008
the relationship between operational slack and ROA.ġ This
(0.007) (0.004) (0.007)
supports the hypothesis 3, but not supports the hypothesis 4.
GDP 4.610*** -0.884 4.314***
Table 4 Results of Estimation Regression
(1.400) (0.923) (1.411)
Model 1 Model 2 Model 3
INF -2.891** 1.288 -3.741**
Var Fixed Effect Fixed Effect Fixed Effect
Model Model Model (0.736) (0.934) (1.525)
C 1.535** 0.699 -1.410* R² 0.572 0.823 0.575
(0.736)- (0.497) (0.741) F-stat 189.062*** 438.048*** 126.998***
FS -0.560*** -0.009 -2.656 Note: * denotes significance at level of 10%˗** denotes significance at level
of 5%; *** denotes significance at level of 1%. Values in the parenthesis are
(0.290) (0212) (0.30) standard errors.
FS2 0.242*** -0.009 -0.001
(0.0259) (0.02) (0.002) V. CONCLUSION
OS -0.001 -0.001 0.000 The purpose of this study is to investigate the effect of
financial slack and operational slack on firm performance by
using samples of 125 real estate companies listed in Shanghai

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