Slack resources and firm performance: evidence from GCC countries

Abstract

PurposeManagement research has emphasized the effects of slack resources on the decision-makers’ strategic choices. Behavioral theorists have argued for a positive effect of slack through encouraging search and innovation while agency theorists have emphasized that slack can accentuate the principal–agent problem, which negatively affects firm performance. This paper aims to extend this argument and empirically investigate the separate effects of three types of slack resources (i.e. available, recoverable and potential) on firm performance in an important emerging market, namely, the Gulf Cooperation Council (GCC).Design/methodology/approachThe two-step system generalized method of moments (Sys-GMM) is applied to a panel of 360 firms in the six GCC countries, namely, Kuwait, Saudi Arabia, UAE, Qatar, Oman and Bahrain, over the period between 1999 and 2019.FindingsThe authors find that available and potential slack are both negatively associated with firm performance. The relationship between recoverable slack and performance is quadratic (inverse U-shaped) where recoverable slack improves performance only up to a specific point, but after that level, recoverable slack starts to negatively affect the performance of the firm.Originality/valueThis paper contributes to the literature in three important ways. First, this paper advances a first attempt to differentiate between three separate types of slack on firm performance in the context of the GCC market. Second, this paper empirically investigates the presence of the principal–agent problem in the GCC market and relates it to the ongoing debate on the agency effects of slack resources. Finally, this paper underlines the effects of institutional frameworks and environments on the relationship between slack resources and firm performance.