Firm Size as Moderator in the Innovation, Capital Structure and Profitability Relationship

Abstract

Under the Resource-Based View (RBV), innovation is a strategic, firm-specific resource that can create sustainable competitive advantage. Because innovation requires substantial investment and financing, it may affect both capital structure and profitability; however, this relationship remains underexplored in Indonesia, particularly with respect to firm size as a moderator. This exploratory study examines the associations between innovation and capital structure and profitability, and the moderating role of firm size, using secondary data from manufacturing companies listed on the Indonesia Stock Exchange (IDX) during 2020–2025. Only 10 of 165 firms had complete audited reports and variable data, producing 60 firm-year observations. Innovation was proxied by R&D intensity, capital structure by debt-to-equity ratio (DER), profitability by return on equity (ROE), and firm size by the natural logarithm of total assets. WarpPLS was used to estimate the structural relationships. Innovation was positively associated with capital structure (β = 0.395, p < 0.001), while its association with profitability was negative but statistically insignificant (β = −0.109, p = 0.191). Capital structure was positively associated with profitability (β = 0.787, p < 0.001), although DER and ROE share equity as a denominator. The interaction terms for innovation, firm size, and capital structure were not statistically significant. Because the sample is small and the model-fit indices SPR and RSCR fall below their thresholds, the findings are preliminary associations, not causal evidence.