Shangoon Lee: Corporate Governance, Financial Slack and Firm Performance. a Comparative Study Between Us and Uk

Seoul Journal of Business Volume 18, Number 1 (June 2012)

Corporate Governance, Financial Slack and Firm Performance: A Comparative Study between US and UK

SANGHOON LEE*1)

Hannam University Daejeon, Korea

Abstract

This paper presents an empirical analysis of the relationship between financial slack and firm performance using a large panel data set of the U.S. and the U.K. firms. Conducting dynamic GMM regressions, the empirical analysis finds that there are the negative relationship between slack and performance in the U.S. and the positive relationship in the U.K. These empirical findings support the hypothesis that the relationship between slack and performance differs across corporate governance systems. The novelty of the paper lies in its demonstration of the conclusion on the role of corporate governance in the relationship between slack and performance as well as the fact that we could obtain the result by comparing the two countries—the U.S. and the U.K—that have been regarded as belonging to a single corporate governance system. Keywords: Corporate Governance, Financial Slack, Organizational Slack, GMM Regression

INTRODUCTION

The current study investigates the relationship between financial slack and firm performance and the moderating role of corporate governance on the relationship. While some empirical studies analyze the impact of slack on firm performance, there exists little

* Full-time Tenure-track Lecturer, Department of Economics, Hannam University, 70 Hannamro, Daedeokgu, Daejeon, Republic of Korea, 306-791 (sanghoonlee@ hannam.ac.kr), Tel.+82-42-629-7614.

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Seoul Journal of Business

systematic research on the effect of different corporate governance structures on the relationship between slack and performance. Since the pioneering study of Berle and Means (1932), there has been growing literature on corporate governance. During the 1970s and 1980s, corporate governance research examines an individual governance...