This explanatory study uses the panel data analysis to test the influence of innovation strategy on firm’s capital structure. This study has three objectives. Firstly, the empirical investigation will assess the extent to which Indonesian manufacturing companies listed in BEI investing their money to R&D activities as the way to be an innovator in their industry. Secondly, we will investigate the role of innovation strategy in explaining the capital structure decision. Finally, the study will also examine the relationship between the interaction of innovation strategy and firm’s profitability toward capital structure decision.
Previous study suggest that firms pursuing an innovation strategy require a certain level of equity that provide a financial buffer to ensure stability and availability of funds for research efforts, new product launches, and on-going development of knowledge based capabilities (O’Brien, 2003). In other words, firms need to maintain their financial slack before decided to take innovation strategy as their grand strategy. This paper is made by considering that corporate strategy can help in explaining the variation in capital structure choices made by manufacturing companies in Indonesia. In an Industry, competitive strategy forms that were chosen by managers will determine the strategic value of decision to retain their certain financial slacks.
Using Annual Report data of 67 manufacturing companies from 2000 until 2005, this study confirms that financial slack be the important determinant for the firm to lead innovation strategy. Firms pursuing an innovation strategy have low financial leverage. This study also finds that the more important innovation for company strategy, the stronger the negative relationship between profitability and leverage will b
