Unlike to react effectively to competitive pressures, favoring the

Unlike the case discussed above, there is
an argument that financial slack is strongly associated with inefficiency regarding investment projects that do not yield value for
shareholders, which in turn lead to poor firm performance. For instance, if firms
with surplus slack become satisfied, too optimistic and feel less obliged to
make investments in Research and Development, the way of allocation of
financial slack for investments is subject to the philosophy and interests of
the owners, which may even be conflicting, and it can be considered that the
lack of resources is not the hindrance of entrepreneurs. Moreover, resource constraint theorists argue that slack reduces
entrepreneurial creativity (Baker and Nelson, 2005, Mosakowski, 2002). Likewise, (Zona (2012), Debruyne et al., 2010) argued that the existence of excess financial slack can provide
poor performance by protecting the company from external shocks,  making managers believe they are able to
react effectively to competitive pressures, favoring the managerial
accommodation and irrational optimism, but also make them less motivated to do
and leading inadequate implementation of strategies. Previous empirical studies
discussed this opposing views in argument of an inverted U-shaped relationship
between financial slack and firm performance. Particularly, the performance
benefit of financial slack as supported by behavioral theorists, increase rapidly with slack, but then level off as there are too
 many valuable opportunities out there
which entrepreneurs can look for (Nohria
and Gulati, 1997, Hambrick
and Finkelstein, 1987).  According to Nohria and Gulati (1997), the costs of slack are limited when slack is low, but start to
rise quickly when slack gets beyond a certain level and the net effect of these
two ways, an inverted U-shaped relationship, suggests that holding an optimum
level of slack is best in any organizational setting.

Slack resources, however, do not deed themselves and simply
holding resources is not enough to create value out of those resources (Sirmon
et al., 2007) and previous studies documented the relationship between
financial slack and firm performance by investigating when, where, and how
these resources impact performance.  With this regard, we reviewed the previous
empirical investigation in accordance with the type of relationship studies that
slack and performance have, that is, we organized literatures based on positive, negative and U-shaped
relationship of financial slack and firm performance as follows.

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Several studies documented positive relationship between
financial slack and frim performance. For instance, Vanacker et al. (2013) taking venture capital and angel investors as moderator on the
relationship of slack and performance, found robust positive relationship
between financial slack and firm performance in Venture capital-backed firms
when investors hold high ownership risks. Similarly, Picolo et al. (2017) using the gross profit margin of Brazilian and Chilean firms as
measure of financial slack, documented that high discretionary financial slack exhibited
negative extent and a positive association with the financial resources demand,
and the study indicated that firms become inspired in new investments and in
strategic choices when there is  financial resources are highly demanded.


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