Organizational Slack and Firm Performance During Economic Transitions: Two Studies from an Emerging Economy

Strategic Management Journal, Vol. 24, pp. 1249-1263, 2003

15 Pages Posted: 16 Feb 2010

See all articles by Justin Tan

Justin Tan

York University - Schulich School of Business

Mike W. Peng

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: 2003

Abstract

How does organizational slack affect firm performance? Organization theory posits that slack, despite its costs, has a positive impact on firm performance. In contrast, agency theory suggests that slack breeds inefficiency and inhibits performance. The empirical evidence, largely from developed economies, has been inconclusive. Moreover, little effort has been made to empirically test whether such an impact (positive or negative) is linear or curvilinear. This article joins the debate by extending empirical work to the largely unexplored context of economic transitions. Specifically, two studies, based on survey and archival data (N = 57 and 1532 firms, respectively), are undertaken in China’s emerging economy. Our results suggest (1) that organization theory generates stronger predictions when dealing with unabsorbed slack, and (2) that agency theory yields stronger validity when focusing on absorbed slack. Furthermore, we also find that the impact of slack on performance is curvilinear, which resembles inverse U-shaped curves. Overall, our findings call for a contingency perspective to specify the nature of slack when discussing its impact on firm performance.

Suggested Citation

Tan, Justin and Peng, Mike W., Organizational Slack and Firm Performance During Economic Transitions: Two Studies from an Emerging Economy (2003). Strategic Management Journal, Vol. 24, pp. 1249-1263, 2003. Available at SSRN: https://ssrn.com/abstract=1552171 or http://dx.doi.org/10.2139/ssrn.1552171

Justin Tan (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://www.schulich.yorku.ca/SSB-Extra/Faculty.nsf/faculty/Tan%20Justin

Mike W. Peng

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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