While resource-based theory and the behavioral theory of the firm tend to argue for the positive relation between organizational slack and firm performance, standard agency theory predicts a negative effect of slack on performance. The study analyzes the panel data of 280 British firms for 19 years by using random effects FGLS regression technique and Granger causality test in order to investigate the relationship between organizational slack and firm performance. The empirical analysis finds (i) the negative and U-shaped effect of potential slack on firm performance and (ii) the positive effect of available slack. These results partially support agency theory in the case of potential slack and the resource-based and behavioral theory of the firm in the case of available slack.

Keywords : Organizational Slack, Firm Performance