Though Barnard (1968) stated the role of slack in his work on ‘the Functions of the Executive’, the specific label of ‘slack’ had not been conceived until March and Simon (1958) issued their influential book of ‘organization’ in 1958. Organization theorists considered the firm as a unit alike to an organism that needs survival as the ultimate goal (Cyert and March, 1963, Pfeffer and Salancik, 1978, Thompson, 1967). Organizational slack has been defined as a cushion of actual or potential resources that enable a firm to adjust effectively to internal pressures for alteration or to external pressures for alteration in policy, and to pledge changes in strategy related to the external environment (Bourgeois, 1981, Nohria and Gulati, 1997). According to Cyert and March (1963), slack is defined as the difference between the resources available and the outgoings required to maintain the partnership. Moreover, Dimick and Murray (1978) defined slack as resources that have been acquired which are not dedicated to a necessary operation. From these definitions, slack is supposed to be the resource available to the organization, which is beyond the minimum requirement to operate a required level of production (Geiger and Cashen, 2002).
Slack resources comprise human, technological and financial slacks. Prior literature suggested that there are multiple components of financial slack (Bourgeois, 1981, Singh, 1986, Geiger and Cashen, 2002). These components are typically based on the financial data and described as available, recoverable and potential slacks (Bourgeois, 1981, Bromiley, 1991, Daniel et al., 2004, Bradley et al., 2011, Marlin and Geiger, 2015), absorbed and unabsorbed slack (Tan, 2003, Lin et al., 2009, Huang and Li, 2012, Argilés-Bosch et al., 2016) and high-discretion and low discretion slack George (2005). These approaches used to categorized slack are similar in that slack resources are either available and unabsorbed or already absorbed and recoverable, are considered internal slack, when slacks are not currently in the organization are considered as external, potential, and unabsorbed (Bourgeois, 1981, Bromiley, 1991, Daniel et al., 2004, Bradley et al., 2011, Marlin and Geiger, 2015). Based on these similarities we inclined to use the category of financial slack as available, recoverable, and potential slack (Bourgeois, 1981, Bromiley, 1991, Daniel et al., 2004, Bradley et al., 2011, Marlin and Geiger, 2015).
Available slack clarify the types of slack that are unused, but readily available which has been operationalized in prior literature using measures of liquidity as current ratio (current assets/current liabilities) and working capital (current assets-current liabilities) (Bourgeois, 1981, Bromiley, 1991, Daniel et al., 2004, Bradley et al., 2011, Marlin and Geiger, 2015). Recoverable slack captures the extent to which organizations have embedded resources in the form of excess costs that could be recovered during the financially difficult times. Potential slack presents the current potential to the firms to obtain resources through debt financing (Marlin and Geiger, 2015) and is operationalized as the ratios of debt to equity, debt to sales and, and debt to assets. Recoverable slack has been operationalized as the ratio of selling, general, and administrative expenses to sales (Bourgeois, 1981, Bromiley, 1991, Daniel et al., 2004, Bradley et al., 2011, Marlin and Geiger, 2015).