The ultimate goal of firms is wealth maximization andare implementing different strategies in achieving the stated goal. Of which, properresource utilization of firms is the most important strategy which in turnleads to sound performance of firms. There arewell-known mechanisms or privileges  to maintainfirms’ sound performance, such as increasing demand for certain products;introducing technological advancements that call for production on a largerscale; exploiting innovations; taking advantage of opportunities to obtain abetter market share; and, looking for protection against negative environmentalchanges (Sanchez, 1995).

For doing so, the strategy that is implemented towards theproper utilization of resources that the firm has is the most crucial and non-replaceable.Resources can be categorized as human resources, intellectual resources andfinancial resources and the collective use of these resources will lead tosound firms’ performance if they are properly and carefully used andutilized.  In this study, we consider thefinancial resources which is in the form of financial slack that can impact thefirm’s performance favorably or adversely based on the capacity of managers toutilize or redeploy it. Financial resources are regularly required to support theredeployment of strategic resources that is, it may need to be customized for usein a new circumstance, or extra resources may have to be obtained to complementthe reallocated resources (Argilés-Bosch et al.,2016). This shows that slack is closely related with the availabilityof 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 minimumrequired 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 performanceadversely or favorably. Accordingly,  theresource-based and the behavioral theory embrace that slack acts as a safeguardin times of environmental turmoil, decrease the conflict among employees and promoteinnovation, whereas the pecking order theory proposed that in the existence ofinformation asymmetry between the firm and investors, firms would chooseinternal funds over external funds to finance investment. However, agencytheory sated that slack is potential source of agencyproblems, which raises inefficiency, hinders risk-taking capacity and woundedperformance.

Moreover, previous empirical studies widely investigated theimpact of financial slack on firms’ performance supports resource-based theory,and behavioral theory which documented the favorable effect of financial slackon firms’ financial performance (Shahzad et al., 2016, Bradley et al., 2011, Danielet al.

, 2004, Chen andMiller, 2007, Wan andYiu, 2009, Peng et al., 2010, Liu et al., 2014, Tan andPeng, 2003). To the contrary, previous studiesalso found the inverse relationship between financial slack and firms’performance which is in favor of the pecking order theory as it is introducedby Myers  and suggests that the excessresources represented by slack should be eliminated by the firm  (Altaf and Shah, 2017, Voss et al.

, 2008, Lathamand Braun, 2009). Further, other previous studiesdocumented that there exist curvilinear relationship between slack and firmperformance, having an inverse U-shape which shows as too little as well as toomuch slack being problematic, firms need to maintain the optimum level of slackresources (Tan and Peng, 2003, George, 2005, Wiersma,2017a).  Like many other researchable areas, previousstudies extensively examined the relationship of slack and firm performance indeveloped nations (Danielet al., 2004, Bradley et al., 2011, Argilés-Bosch et al.,2016, Wiersma, 2017a, Stan et al.

, 2014) and some of them examined the samein emerging nations such as China (Liu etal., 2014, Yang and Chen, 2017, Chen and Miller, 2007, Peng etal., 2010) and India  (Altafand Shah, 2017). However, this area is ignored inthe case of the firms in developing countries and all the above stated preciousstudies focused only in a single country level.

The current study, therefore,contributes for the literature in the following ways: (1) we understand thatthere is inconsistency in previous studies regarding the relationship betweenfinancial slack and firm performance and this study contributes in providingnew insight in this regard (2) to our best of knowledge there is no empiricalstudy in this area in firms in Africa and this study surely contributes inproviding new insight for the case of developing countries (3) most previousstudies focused on single country samples which lacks the broad picture of thelink between financial slack and frim performance in counties withheterogeneous firm characteristics and business environments.  This study contributes to the corporatefinance literature by examining the impact of financial slack in Africa inwhich firms have heterogeneouscharacteristics and operating in heterogeneous business environments. Thishelps to capture how country, industry andfirm heterogeneity interact the relationship of financial slack and firms’financial performance.

The inclusion of heterogeneous characteristics of firmsand country is motivated by previous empirical studies. Most previous studies,unlike the above studies on slack and performance, underline that detectingthe bases of variation in firm performance is one of the foundations ofstrategy researches, that is, country, industry, and firm effects are importantto the performance of firms (Teece, 2010, Khanna and Rivkin, 2001,Heniszand Zelner, 2006, McGahanand Victer, 2010, Ma etal., 2012). Thus, the current studyinvestigates the relationship between financial slack and firm performance offirms in Africa by controlling country, firm and industry effects so as to reachto clear policy implication.