Role of Slacks on Firm Performance During a Corporate Scandal

Abstract

Corporate scandals have far-reaching consequences on firms in the short and long terms; however, only limited studies have examined how to mitigate them. Addressing this gap and drawing on a resource-based perspective, our study examines whether organizational slacks mitigate a corporate scandal’s short- and long-term impact on firm value and firm risk. We posit that this mitigating effect depends on the timeframe of the strategic vision and the firm’s needs and follows a curvilinear effect for each timeframe, short and long terms. In addition, we explore the role of different industry specifications in the mitigating effects of slacks in a scandal situation. Using an event study approach on 873 corporate scandals between 2012 and 2018, our empirical analysis first confirms that corporate scandals decrease short- and long-term firm value and increase firm risk. Then, based on a resource-based perspective, we reveal that holding slacks mitigates the corporate scandal’s impact on short- and long-term firm values, represented as an (inverted) U-shape. Conversely, the mitigating effect of slacks follows a U-shape on firm risk. Overall, our study highlights how specific resources can mitigate corporate scandals’ shock and how distinct levels of slacks and timeframes impact firm performance. From a practical perspective, we reveal that managers will benefit from accumulating slacks during shock-free periods to a certain amount which they can use when facing corporate scandals. Furthermore, we find that managers need to consider both short and long terms in using slacks during a corporate scandal. Finally, our findings shed light on the importance of considering industry characteristics when using internal resources to deal with a scandal.