Abstract
Organizational slack is an important topic in the organization literature. The extant research has documented both the positive and the negative attributes of slack. However, regarding the effect of organizational slack on external investors' investment decisions, little is known. Based on insights drawn from the signaling and cognitive bias literature, this study proposed that organizational slack provides a signaling effect for external stakeholders and positively affects their subsequent decision making. We further proposed that external stakeholders are subject to the influence of cognitive bias and that the strength of the positive effect of slack is contingent on the context of the organization being a state-owned or a private firm. An experimental research design was used to test these hypotheses. Consistent with our predictions, we found that organizational slack has a positive signaling effect on external investors' investment decisions and that this positive effect is weaker in state-owned firms than in private firms. The contributions and implications of this study are also discussed.
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