Human resources slack and profitability: SMEs, large firms, and the role of business group affiliation

Abstract

This paper bridges behavioral theory of the firm arguments, the liability of smallness and the business groups literature to study the relationship between human resources slack and profitability. Specifically, the study proposes that both the negative and positive impacts of human resource slack are stronger for SMEs than for larger firms. Indeed, the risk-buffering capacity of slack is more important for smaller, more vulnerable firms, but at the same time, having slack reduces entrepreneurial risk-taking and increases internal rigidity. The study also proposes that business groups’ internal labor markets reduce both the benefits and limitations of holding human resources slack, leading to a weaker relation between human resources slack and profitability. The results, based on a large sample of French privately held firms, partly support our predictions. Overall, this paper extends our understanding of the importance of organizational structures in allocating and managing key strategic resources.