Efficiency in a Time of Crisis: An Empirical Study of Efficiency and Slack Resources Surrounding the Financial Crisis

Abstract

The dot-com crash in 2001, the financial crisis in 2007 & 2008 and the current ongoing Covid-19 pandemic have all challenged organizations to reorganize themselves to compete in dynamic environments. This thesis argues that organizations need to be in control of their resources by optimizing the efficiency of these resources, but also enhancing the perspective of flexibility that slack resources create. This theoretical framework shaped the development of hypotheses, which consisted of four key hypotheses aiming to expose the relationship between slack resources and financial performance in a dynamic environment. The hypotheses first test for the main effects between slack resources and financial performance, by analysing both the negative and positive aspects of slack resources. The hypotheses are further developed with additionally four hypotheses that test for both interactions and nonlinear relationships between slack resources and financial performance. The hypotheses are tested in three different time periods surrounding the financial crisis in 2007 and 2008 with a total of 2,006 US organizations. The statistical application of the OLS regression model is used to examine the hypotheses and test the assumptions affiliated with this type of regression model. The findings in the regression models show support for higher cash ratios leading to statistically significant positive effects on financial performance during the financial crisis. Confirming that a high degree of short-term liquid assets provide organizations with flexibility and the capability of exploiting their internal resources in a dynamic environment. This positive assessment is followed by statistically significant negative impacts from higher debt, higher organizational slack, and higher R&D intensity. This indicates that organizations should aim for efficiency in respect to these slack resources. A combination of slack resources and efficiency is statistically proved, indicating a more balanced view resulting in improved financial performance. The results of this thesis underline the importance for organizations to evaluate their use of resources in dynamic environments to maximize their financial performance and obtain a sustained competitive advantage.