The ultimate goal of firms is wealth maximization and
are implementing different strategies in achieving the stated goal. Of which, proper
resource utilization of firms is the most important strategy which in turn
leads to sound performance of firms. There are
well-known mechanisms or privileges  to maintain
firms’ sound performance, such as increasing demand for certain products;
introducing technological advancements that call for production on a larger
scale; exploiting innovations; taking advantage of opportunities to obtain a
better market share; and, looking for protection against negative environmental
changes (Sanchez, 1995). For doing so, the strategy that is implemented towards the
proper utilization of resources that the firm has is the most crucial and non-replaceable.
Resources can be categorized as human resources, intellectual resources and
financial resources and the collective use of these resources will lead to
sound firms’ performance if they are properly and carefully used and
utilized.  In this study, we consider the
financial resources which is in the form of financial slack that can impact the
firm’s performance favorably or adversely based on the capacity of managers to
utilize or redeploy it.

Financial resources are regularly required to support the
redeployment of strategic resources that is, it may need to be customized for use
in a new circumstance, or extra resources may have to be obtained to complement
the reallocated resources (Argilés-Bosch et al.,
2016). This shows that slack is closely related with the availability
of financial resources. Nohria and Gulati (1997) and Tan and Peng (2003) defined slack as the ‘pool of resources in  the firm that is in excess of the minimum
required resources to operate or produce a given level of firm’s  operation or output.

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Organizational theories such as resource-based theory (Penrose, 2009); the behavioral theory  (Cyert and March, 1963); the pecking order theory (Myers, 1984), and the agency theory (Jensen and Meckling,
1976) discussed whether slack resources affect the firm’s performance
adversely or favorably. Accordingly,  the
resource-based and the behavioral theory embrace that slack acts as a safeguard
in times of environmental turmoil, decrease the conflict among employees and promote
innovation, whereas the pecking order theory proposed that in the existence of
information asymmetry between the firm and investors, firms would choose
internal funds over external funds to finance investment. However, agency
theory sated that slack is potential source of agency
problems, which raises inefficiency, hinders risk-taking capacity and wounded
performance. Moreover, previous empirical studies widely investigated the
impact of financial slack on firms’ performance supports resource-based theory,
and behavioral theory which documented the favorable effect of financial slack
on firms’ financial performance (Shahzad et al., 2016, Bradley et al., 2011, Daniel
et al., 2004, Chen and
Miller, 2007, Wan and
Yiu, 2009, Peng et al., 2010, Liu et al., 2014, Tan and
Peng, 2003). To the contrary, previous studies
also found the inverse relationship between financial slack and firms’
performance which is in favor of the pecking order theory as it is introduced
by Myers  and suggests that the excess
resources represented by slack should be eliminated by the firm  (Altaf and Shah, 2017, Voss et al., 2008, Latham
and Braun, 2009). Further, other previous studies
documented that there exist curvilinear relationship between slack and firm
performance, having an inverse U-shape which shows as too little as well as too
much slack being problematic, firms need to maintain the optimum level of slack
resources (Tan and Peng, 2003, George, 2005, Wiersma,
2017a).  Like many other researchable areas, previous
studies extensively examined the relationship of slack and firm performance in
developed nations (Daniel
et al., 2004, Bradley et al., 2011, Argilés-Bosch et al.,
2016, Wiersma, 2017a, Stan et al., 2014) and some of them examined the same
in emerging nations such as China (Liu et
al., 2014, Yang and Chen, 2017, Chen and Miller, 2007, Peng et
al., 2010) and India  (Altaf
and Shah, 2017). However, this area is ignored in
the case of the firms in developing countries and all the above stated precious
studies focused only in a single country level. The current study, therefore,
contributes for the literature in the following ways: (1) we understand that
there is inconsistency in previous studies regarding the relationship between
financial slack and firm performance and this study contributes in providing
new insight in this regard (2) to our best of knowledge there is no empirical
study in this area in firms in Africa and this study surely contributes in
providing new insight for the case of developing countries (3) most previous
studies focused on single country samples which lacks the broad picture of the
link between financial slack and frim performance in counties with
heterogeneous firm characteristics and business environments.  This study contributes to the corporate
finance literature by examining the impact of financial slack in Africa in
which firms have heterogeneous
characteristics and operating in heterogeneous business environments. This
helps to capture how country, industry and
firm heterogeneity interact the relationship of financial slack and firms’
financial performance. The inclusion of heterogeneous characteristics of firms
and country is motivated by previous empirical studies. Most previous studies,
unlike the above studies on slack and performance, underline that detecting
the bases of variation in firm performance is one of the foundations of
strategy researches, that is, country, industry, and firm effects are important
to the performance of firms (Teece, 2010, Khanna and Rivkin, 2001,
and Zelner, 2006, McGahan
and Victer, 2010, Ma et
al., 2012). Thus, the current study
investigates the relationship between financial slack and firm performance of
firms in Africa by controlling country, firm and industry effects so as to reach
to clear policy implication.