This study aims to investigate the influence of financial slack on firm innovativeness, with board of commissioners and the board of directors as moderating variables. The population of this study consists of 61 companies listed in the Indonesian Stock Exchange, but during the course of the research, some companies were eliminated due to incomplete relevant data from year 2016 to 2021. After the statistical analysis and modelling, this study found that financial slack does not influence firm innovativeness. Similarly, the moderating variables, board of commissioners and the board of directors, also do not moderate the influence of financial slack on firm innovativeness. Hence, the results contradict the hypothesized relationships. This study argues that these findings might be influenced by the economic conditions in Indonesia at that time of the COVID-19 pandemic. As a result, companies shifted their focus and priorities, placing a higher emphasis on the financial health and risk management of the company rather than using excess resources to enhance corporate innovation. While this study is limited to the available sample size, as not all companies allocate their funds for innovation activities, its novelty lies in the inclusion of the board of commissioners and the board of directors as moderating variables in examining the influence of financial slack on firm innovativeness. As such, the research model and findings contribute to the diversity of existing research outcomes on similar topics.
Financial slack, firm innovativeness, board of commissioners, board of directors
A.A. Pt. Agung Mirah Purnama Sari. Department of Accounting, Faculty of Economics and Business, Universitas Warmadewa, Bali, Indonesia. E-mail: agungputumirah@gmail.com
Ashwin, A. S., Krishnan, R. T., & George, R. (2016). International Studies of Management & Organization Board Characteristics, Financial Slack and R & D Investments. 8825 (January). https://doi.org/10.1080/00208825.2015.1007007
Beck, F. & Beuren, I.M. (2022). The interface of organisational slack with innovation: a study of a textile company. International Journal of Business Innovation and Research (IJBIR), Vol. 29, No. 3.
Bourgeois, L. I., & Singh, J. V. (1983). Organizational Slack and Political Behavior Among Top Management Teahis. Acad. Mnagement Proc., 43–48.
Carnes, C. M., Xu, K., Sirmon, D. G., & Karadag, R. (2019). How Competitive Action Mediates the Resource Slack – Performance Relationship: A Meta-Analytic Approach. J. Manag. Stud, 56(1), 57–90. https://doi.org/10.1111/joms.12391
Chu, S.H., Ren, Y., Cai, H., Xu, Y. and Bao, S. (2021). Financial slack, operational slack and firm performance during episodes of financial crises: A panel data analysis. International Conference on Public Management and Intelligent Society (PMIS), Shanghai, China, 2021, pp. 144-148, doi: 10.1109/PMIS52742.2021.00039.
Duan, Y., Wang, W., & Zhou, W. (2020). The multiple mediation effect of absorptive capacity on the organizational slack and innovation performance of high-tech manufacturing firms: Evidence from chinese firms. International Journal of Production Economics, 229(3), 107754. https://doi.org/10.1016/j.ijpe.2020.107754.
Ehie, I. C., & Olibe, K. (2010). The effect of R&D investment on firm value: An examination of US manufacturing and service industries. International Journal of Production Economics, 128(1), 127–135. http://dx.doi.org/10.1016/j.ijpe.2010.06.005
Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review. Academy of Management Review, 14(1), 57–74.
Fuad, F. (2012). The effect of innovativeness on the relationship between diversification and slack. EKUITAS (Jurnal Ekonomi dan Keuangan). Vol. 16 No. 3 (2012). https://doi.org/10.24034/j25485024.y2012.v16.i3.348
George, G. (2005). Slack Resources and the Performance of Privately Held Firms. Academy of Management Journal. 48, (4), 661-676.
Greve, H. R. (2003). A Behavioral Theory of R & D Expenditures and Innovations: Evidence from Shipbuilding. Academy of Management, 46(6), 685–702.
Guo, F., Zou, B., Zhang, X., Bo, Q. & Li, K. (2020). Financial slack and firm performance of SMMEs in China: Moderating effects of government subsidies and market-supporting institutions. International Journal of Production Economics. Volume 223, May 2020, 107530. https://doi.org/10.1016/j.ijpe.2019.107530
Hermanto, Y. B., Lusy, L., & Widyastuti, M. (2021). How financial performance and state-owned enterprise (Soe) values are affected by good corporate governance and intellectual capital perspectives. Economies, 9(4). https://doi.org/10.3390/economies9040134
Heubeck, T. & Meckl, R. (2023). Does board composition matter for innovation? A longitudinal study of the organizational slack–innovation relationship in Nasdaq-100 companies. J Manag Gov. https://doi.org/10.1007/s10997-023-09687-4
Hong, S. & Shin, H.D. (2021). Organizational slack and innovativeness: the moderating role of institutional transition in the Asian financial crisis. Asian business & management, 20(3), pp. 370–389. https://doi.org/10.1057/s41291-019-00094-y.
Husna, A., & Satria, I. (2019). Effects of Return on Asset, Debt to Asset Ratio, Current Ratio, Firm Size, and Dividend Payout Ratio on Firm Value. International Journal of Economics and Financial Issues, 9(5), 50–54.
Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. The American Economic Review, 76(2), 323–329.
Jensen, M. C. (1997). Eclipse of the Public Corporation Eclipse of the Public Corporation. Harvard Business Review, Sept-Oct 1989, Revised 1997, 1–31.
Jermias, J. & Yigit, F. (2023). Investigating the effects of innovation intensity and lenders’ monitoring on the relation between financial slack and performance. Journal of Accounting & Organizational Change, Vol. 19 No. 3, pp. 494-512. https://doi.org/10.1108/JAOC-05-2022-0078
Kim, H., Kim, H., Lee, P. M., Kim, H., & Lee, P. M. (2008). Ownership Structure and the Relationship Between Financial Slack and R & D Investments: Evidence from Korean Firms. June 2014. Organization Science, 19 (3). https://doi.org/10.1287/orsc.1080.0360
Lee, S. (2015). Slack and innovation: Investigating the relationship in Korea. Journal of Business Research, 68(9), 1895–1905. https://doi.org/10.1016/j.jbusres.2014.12.009
Lewis, T.C. (2013). A Review and Analysis of the Effects of Financial Slack on Firm Innovation. Theses and Dissertations. 331. https://dc.uwm.edu/etd/331
Lu, L.H. & Wong, P.K. (2019). Performance feedback, financial slack and the innovation behavior of firms. Asia Pac J Manag. 36, 1079–1109 (2019). https://doi.org/10.1007/s10490-018-9634-4
Marlin, D., & Geiger, S. W. (2015). A reexamination of the organizational slack and innovation relationship. Journal of Business Research, 68(12), 2683–2690. https://doi.org/10.1016/j.jbusres.2015.03.047.
Meyer, M. & Leitner, J. (2018). Slack and innovation: The role of human resources in nonprofits. Nonprofit management & leadership, 29(2), pp. 181–201. https://doi.org/10.1002/nml.21316.
Mishina, Y., Pollock, T. G., & Porac, J. F. (2004). Are more resources always better for growth? Resource stickiness in market and product expansion. Strategic Management Journal, 25, 1179–1197. https://doi.org/10.1002/smj.424
Mousa, F. & Chowdhury, J. (2014). Organizational slack effects on innovation: the moderating roles of CEO tenure and compensation. Journal of Business Economics and Management, 15:2, 369-383, DOI: 10.3846/16111699.2013.839476
Mousa, F., & Reed, R. (2013). The Impact of Slack Resources on High–Tech IPOs. Entrepreneurship Theory and Practice, 37(5), 1123-1147. https://doi.org/10.1111/etap.12001
Nam, H. (2019). The dividend payout policy and R & D for loss firms: Evidence from South Korea from South Korea. Asia-Pacific Journal of Accounting & Economics, 26(1–2), 172–183. https://doi.org/10.1080/16081625.2019.1546564
Nguyen, T.T., & Chieu, T.D. (2018). Slack resources and innovation in Vietnamese SMEs: A behavioural, stewardship, and institutional perspective. WIDER Working Paper 2018/78. Helsinki: UNU-WIDER. https://doi.org/10.35188/UNU-WIDER/2018/520-6
Nohria, N., & Gulati, R. (1996). Is Slack Good or Bad for Innovation. The Academy of Management Journal, 39(5), 1245–1264.
Odum, A. N., Odum, C. G., & Okoye, G. O. (2019). The Impact of Financial Slack on Firm Performance in a Recessed Economy: The Nigerian Experience. Indonesian Journal of Contemporary Accounting Research, 1(2), 69 76.
Parida, V., & Örtqvist, D. (2015). Capability, and Financial Slack on Technology-Based. Journal of Small Business Management, 53(S1), 278–298. https://doi.org/10.1111/jsbm.12191
Putri, W., Nurwiyanta, N., Sungkono, S. & Wahyuningsih, T. (2019). The emerging fintech and financial slack on corporate financial performance. Investment Management and Financial Innovations, 16(2), 348-354. doi:10.21511/imfi.16(2).2019.29
Rafailov, D. (2017). Financial Slack and Performance of Bulgarian Firms. Journal of Finance and Bank Management, Vol 5 No 2 December 2017. 10.15640/jfbm.v5n2a1
Shaikh, I. A., Paul, J., Brien, O., & Peters, L. (2018). Inside directors and the underinvestment of fi nancial slack towards R & D- intensity in high-technology firms. Journal of Business Research, 82(September 2017), 192–201. https://doi.org/10.1016/j.jbusres.2017.09.014
Sharfman, M. P., Wolf, G., Chase, R. B., & Tansik, D. A. (1988). Antecedents of Organizational Slack University of Southern California. The Academy of Management Review, 13(4), 601–614. https://doi.org/10.2307/258378
Tabassam, A. H., & Khan, S. (2021). Corporate Governance and Firm Performance: Exploring the Mediating Role of Financial Slack. Journal of Accounting and Finance in Emerging Economies, 7(2), 511-522. https://doi.org/10.26710/jafee.v7i2.1793
Thaha, A. F. (2020). Dampak Covid-19 Terhadap UMKM Di Indonesia [The Impact of Covid-19 on MSMEs in Indonesia]. Jurnal Brand, 2(1), 148–153.
Titus, V., O’Brien, J. P., & Dixit, J. (2022). Does Performance Breed Slack? Ownership as a Contingency to the Performance Feedback and Slack Relationship. Journal of Management, 48(5), 1270-1298. https://doi.org/10.1177/01492063211014263
Tran, K., Nguyen, P., & Nguyen, L. (2018). The Role of Financial Slack, Employee Creative Self-Efficacy and Learning Orientation in Innovation and Organizational Performance. Administrative Sciences, 8(4), 82. http://dx.doi.org/10.3390/admsci8040082
Utama, C. A., & Utama, S. (2019). Board of Commissioners in Corporate Governance, Firm Performance, and Ownership Structure. International Research Journal of Business Studies, 12(2), 111–136.
Vanacker, T., Collewaert, V. & Zahra, S.A. (2017). Slack resources, firm performance, and the institutional context: Evidence from privately held European firms. Strategic Management Journal. Volume38, Issue 6, pages 1305-1326. https://doi.org/10.1002/smj.2583
Vitale, G., Cupertino, S. & Taticchi, P. (2023). Analysing the role of available organisational slack resources in affecting environmental performance. A structural equation modelling approach. Measuring Business Excellence, Vol. 27 No. 3, pp. 341-363. https://doi.org/10.1108/MBE-09-2022-0110
Watts, R. L., & Zimmerman, J. L. (1990). Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, 65(1), 131–156.
Yousaf, S., Anser, M. K., Tariq, M., Jawad, S. U. R. S., Naushad, S., & Yousaf, Z. (2020). Does technology orientation predict firm performance through firm innovativeness? World Journal of Entrepreneurship, Management and Sustainable Development, 7(1), 140–151. https://doi.org/10.1108/WJEMSD-11-2019-0091
Zhang, K., Jing Wang, J., Sun, Y., & Hossain, S. (2021). Financial slack, institutional shareholding and enterprise innovation investment: Evidence from China. Accounting and Finance, 61(2), 3235–3259. https://doi.org/10.1111/acfi.12700
Zona (2012). Corporate investing as a response to economic downturn: prospect theory, the behavioural agency model and the role of financial slack. British Journal of Management, 23 (2012), pp. S42-S57
Cite this article:
A.A. Pt. Agung Mirah Purnama Sari (2023). The influence of financial slack on firm innovativeness: The moderating role of board size. International Journal of Academe and Industry Research, 4 (4), 1-20. https://doi.org/10.53378/353016
License:
This work is licensed under a Creative Commons Attribution (CC BY 4.0) International License.
