Abstract
This research aims to empirically examine the impact of capital structure and innovation on firm performance among small and medium-sized (SMEs) Mexican manufacturing firms and analyze the indirect effects of capital structure to determine mediating effects of innovation. A quantitative approach and cross-sectional design were applied through the Partial Least Squares Structural Equation Modeling (PLS-SEM). A simple random sampling technique and a self-administered questionnaire was used to gather data from a sample of 220 managers or business owners in the state of Aguascalientes, Mexico. The results indicate that capital structure has a significant impact on innovation and only an indirect effect on firm performance. Due to the innovation demonstrated to have a significant full mediating role in this relationship if SMEs want to have better firm performance, they must increase their level of innovation. Therefore, decision-makers must pay special attention to the reinvestment of their profits to increase the levels of innovation and firm performance.
1. Introduction
Capital structure is one of the most important decisions when talking about corporative finance because it deals with how company finances its assets through liabilities and equity [1]. During the last decade, several international studies have researched the relationship between a company’s leverage and performance [2], [3]. However, only a few studies have proved systematically the direct relationship of the determining factors of capital structure in its performance and whether leverage influences said relationship [4]. In this manner, with the seminal contribution of Modigliani and Miller [5], several studies have focused on this topic. According to Myers [6], we can say that there is no universal theory of the formation of the financial structure in business, and there is not a single reason to expect one. However, Stiglitz [7] established the irrelevance of the term of indebtedness and there have been three main lines of investigation that allow to the critical factors that define the capital structure to be determined- Examples of this are agency conflicts, informational asymmetry [1] and the hierarchy order [8]. We must, therefore, analyze the effect of these on corporate performance.
