The Impact of Financial Slack on Firm Performance in a Recessed Economy: The Nigerian Experience

Augustine Nwekemezie Odum(1), Chinwe Gloria Odum(2), Greg Onuorah Okoye(3),


(1) Department of Accountancy, Nnamdi Azikiwe University, Awka, Nigeria
(2) Department of Accountancy, Legacy University, Okija, Nigeria
(3) Department of Accountancy, Madonna University, Okija, Nigeria

Abstract

Adopting the current economic recession in Nigeria, this study investigates whether firms that pile up excess resources until the inception of the crisis experience superior performance during the meltdown. The variables for financial slack were measured as: The proportion of current assets to current liabilities, the ratio of equity to total debt, and the ratio of general and administrative expenses to sales. These proxies are measured over the period 2013 to 2014 prior to the recession. The variable of financial performance is then evaluated over the period of 2015 to 2017. The results show that high pre-crisis levels of liquidity do not impact performance during recession period. However, the findings agree with the view that high pre-crisis levels of debt have a negative influence on firm performance during economic crisis. For the variable of absorbed slack, its relationship with performance was found to be positive, although at a declining rate. Both findings align with the hypothesis that financial slack has value during economic recession. The uniqueness of the approach lies in the assessment of both linear and curvilinear performance effects of financial slack for listed Nigerian firms during the economic recession.

Keywords

economic recession; firm performance; financial slack; Nigeria

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DOI: https://doi.org/10.33455/ijcar.v1i2.95

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