Financial slack and firm performance of SMMEs in China: Moderating effects of government subsidies and market-supporting institutions

Abstract

How does financial slack affect the firm performance of small and medium-sized manufacturing enterprises (SMMEs)? By integrating the literature on financial slack and the institutional perspective, we predict the following: financial slack positively affects the firm performance of SMMEs; research and development (R&D) investment mediates the effect of financial slack on firm performance; and government subsidies and market-supporting institutions positively moderate this mediating effect. Using 543 firms’ 4489 firm-year observations of Chinese SMMEs, the empirical results indicate that financial slack promotes firm performance. In addition, R&D investment partially mediates the relationship between financial slack and firm performance. Moreover, the relationship between financial slack and R&D investment is weakened in high levels of government subsidies, and the relationship between R&D investment and firm performance is strengthened in high levels of government subsidies and market-supporting institutions. Theoretical contributions, practical implications, limitations, and future research avenues are discussed.