When Does Financial Slack Matter? Family Ownership, CEO Family Status, and SME Performance

Abstract

We offer novel insights into the utilization of heterogeneous types of financial slack (unabsorbed, absorbed, and potential) by family versus non-family small- and medium-sized enterprises (SMEs). We hypothesize that agency problems in family SMEs imply idiosyncratic effects on the ability to leverage the different types of financial slack, with implications for financial performance. Moreover, among family SMEs, having a family CEO can engender additional agency problems, reinforcing the heterogeneous effects of slack resources on performance. A longitudinal analysis of a panel dataset of Italian SMEs generally supports our expectations while revealing some counterintuitive findings regarding the effect of unabsorbed financial slack on performance.