The interaction effects of financial development on slack and performance nexus of African firms

Abstract

While the resource-based theory argued that financial slack derives firm performance, agency theory asserted that it harms firm performance. Moreover, the pecking order and corporate finance theories argued that the well-functioning financial system eliminate the agency problems and asymmetric information; and could shape the corporate governance of firms, thereby facilitate the proper use of firms' internal finance. But existing literature completely overlooked this issue. This study thus investigated the interaction effects of the banking sector and the stock market development on slack performance nexus by using African sample firms. The result confirmed that financial development eliminates the adverse effects of high available slack on firm performance but create an undesirable impact of low available slack on firm performance. Conversely, financial development weakens the favorable effect of high potential slack on firm performance but aggravate the adverse effects of low potential slack on firm performance.