Organizational slack in declining firms and surviving firms

Mahua Guha

14 citations0/0 files storedJournal of strategy and management

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

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.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 2010New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index 1964Richard M. Cyert & James G. March, A Behavioral Theory of The Firm, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, 332 s.1966Financial Ratios As Predictors of Failure 1981On the Measurement of Organizational Slack 2003A BEHAVIORAL THEORY OF R&D EXPENDITURES AND INNOVATIONS: EVIDENCE FROM SHIPBUILDING.

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