The effect of financial slack component on firm performance during the financial crisis period: Example of BIST industrial index

The main purpose of the research is to highlight the possible impact of financial slack on the financial performance of 110 companies listed in the Borsa İstanbul Industrial Index during the 2008 Financial Crisis. In this context, the research period, which is called main period betweeen 2005-2014, are categorized into three sub-periods which are pre-crisis period: 2005-2007, crisis period: 2008-2009 and post-crisis period: 2010-2014. In order to achieve the purpose of the research, the relationship between financial slack and firm performance is analysed in more detail both linearly and curvilinearly. The relationship between pre-crisis slack types and crisis-period performance variables are also be investigated by one of the well-known Panel Data Analsis model, namely FGLS. According to the outcomes, an inverse U-shaped curvilinear relationship is figured out between the avaliable slack and firm performance for all periods (pre-crisis, crisis period, post-crisis, main-period and, pre-crisis and crisis-period relationship). This output can be interpreted as while the existing slack causes a performance increase up to a certain level, above that level, it effects firm's performance negatively. However, U-shaped curvilinear relationship is found between recoverable slack and performance in the crisis and the main period. It can be claimed that recoverable slack causes a performance decreases up to a certain level, above that level, increase in company performance can be seen. Furthermore, a inverse U-shaped curvilinear relationship is observed between potential slack and performance in the pre-crisis and the main period. This finding demonstrates that while the relative increase in borrowing up to a certain level (decrease in potential slack) rises up the firm performance, the performance drops after a certain level. Additionally, U-shaped curvilinear relationship is figured out in the crisis period. It should also, be noted that while increasing the borrowing to a certain level (decreasing potential slack) drops the performance, the performance increases after a certain level. Key Words: Financial Slack, BİST, Available Slack, Recoverable Slack, Potential Slack, FGLS