Financial Slack, Corporate Reputation, and Financial Performance: Exploring Mediating Mechanisms in the Creation of Firm Value
Firm value represents one of the most critical measures of business success, reflecting investor perceptions of growth potential and managerial capability. While financial slack, defined as excess financial resources beyond operational needs, has been recognized as a strategic buffer that provides flexibility and resilience, empirical studies show inconsistent results regarding its influence on firm value. This study addresses the research gap by examining the mediating role of corporate reputation and financial performance in the relationship between economic slack and firm value, grounded in the resource-based view (RBV) and stakeholder theory.
The research employs an explanatory quantitative design using data from 143 firm-year observations of non-financial companies listed on the Indonesia Stock Exchange (IDX) during 2021–2023. Variables were measured using free cash flow (financial slack), the Corporate Image Index (reputation), return on assets and return on equity (financial performance), and Tobin’s Q (firm value). Analytical techniques included path analysis and Sobel tests to assess direct, indirect, and total effects.
Results demonstrate that financial slack positively influences both corporate reputation and financial performance. In turn, reputation and performance significantly enhance firm value. The findings further confirm that the impact of financial slack on firm value is largely indirect, mediated through these variables. This provides evidence that slack resources must be strategically managed to generate intangible advantages and operational efficiency that ultimately increase market valuation.
This study contributes to the literature by clarifying inconsistent findings on financial slack, integrating RBV and stakeholder perspectives, and highlighting the importance of intangible and performance-based mediators. For practitioners, the results emphasize that idle resources should not be perceived as inefficiencies, but rather as strategic reserves that, when allocated effectively, strengthen reputation, improve performance, and drive long-term shareholder wealth.
Keywords: Financial Slack; Corporate Reputation; Financial Performance; Firm Value
