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However, the agency theory (Jensen and Meckling, 1976) argued that organizational slack is inefficient and accrues because of poor management which is supported by several empirical studies. Consistent with the agency and pecking order theories, studies investigated the relationship between the financial slack and firm performance documented an inverse relationship between these variables (Voss et al., 2008, Latham and Braun, 2009, Altaf and Shah, 2017). Furthermore, other studies documented that there exists a curvilinear relationship between slack and firm performance, having an inverse U-shape suggesting too little or/ and too much slack being awkward, firms need to uphold the optimal level of slack resources (Tan and Peng, 2003, George, 2005, Wiersma, 2017a).
Like many other researchable areas, previous studies extensively examined the relationship of slack and firm performance in developed nations (Daniel et al., 2004, Bradley et al., 2011, Argilés-Bosch et al., 2016, Wiersma, 2017a, Stan et al., 2014) and in emerging nations such as China (Liu et al., 2014, Yang and Chen, 2017, Chen and Miller, 2007, Peng et al., 2010) and India (Altaf and Shah, 2017). However, this has not been extensively investigated in Africa. Moreover, the aforesaid studies focused only on a single country level. We believed that investigating the slack-performance nexus of firms operating in the heterogeneous business environment and industry characteristics will provide new insight in the field of corporate finance literature. We also believe that the mediating effects of banking sector and stock market development on the slack-performance nexus of firms have to be taken into consideration. The current study, therefore, contributes to corporate finance literature in the following ways. (1) Most previous studies have mainly focused on single country samples which lack the broad picture of the slack-performance nexus of firms operating in countries with heterogeneous firm characteristics and business environments. Thus, this study contributes to the corporate finance literature by exploring the slack-performance relationship of firms with heterogeneous characteristics and operating in heterogeneous business environments. The inclusion of heterogeneous characteristics of firms and country is motivated by previous empirical studies. Most previous studies, suggested that detecting the bases of variation in firm performance that is, country, industry, and firm effects is one of the foundations of strategy studies in corporate finance (Teece, 2010, Khanna and Rivkin, 2001, Henisz and Zelner, 2006, McGahan and Victer, 2010, Ma et al., 2012). (2) This study provides a new insight by investigating the mediating effects of the banking sector and the stock market development on the slack-performance nexus of firms in Africa. We employed mediation analysis using Structural Equation Modeling believing that mediation analysis facilitates a better understanding of the relationship between the financial slack and firm performance through banking sector and stock market development.

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