Unpacking Corporate Slack: How Excess Resources Shape Earnings Management

This study investigates the dual role of organizational slack in shaping managerial behavior by examining its impact on earnings management. Using a large sample of 89,782 firm-year observations of US-listed firms from 1991 to 2022, we find that firms with greater slack are generally less likely to engage in earnings manipulation. We interpret these findings through the lens of the resource-based view (RBV), which provides a perspective on how slack, as a strategic resource, can influence managerial choices. Specifically, by alleviating short-term performance pressures, slack enables managers to prioritize long-term value creation over opportunistic reporting. Decomposing slack into its components reveals nuanced patterns: its effect on real earnings management is robust across firms, whereas its impact on discretionary accruals is significant primarily in firms with strong managerial incentives. Taken together, these findings enhance our understanding of how resource flexibility shapes firms’ financial reporting.