Financial Slack and Performance of Bulgarian Firms

Abstract

Financial slack is a valuable buffer that makes a firm more robust in an uncertain and changing environment. In addition to this strategic advantage, it mitigates conflicts in organization, stimulates innovation activity of firm, and increases the potential for long-term growth. On the other hand, financial slack has negative effects due to reduced control on management. Abundant financial resources could slow the reaction of firm to changes in environment and stimulate irresponsible and reckless behavior of management. This study examines the relationship between financial slack and performance of the Bulgarian firms. The results show positive effects on firm performance, especially for small firms. There are positive effects for both types of slack-available and potential. Some negative influence is found only for the largest companies. The study identifies weak nonlinear relationship between financial slack and performance. This means that negative effects of financial slack will dominate only at very high level.