Although many researches have been conducted in capital structure, nevertheless it is still a puzzle how firms choose their capital structure between debt and equity. There is no clear-cut consensus among corporate executives on how the capital structure should be, what the determinant factors are, or even, whether their financial decision really matters. In fact, the financial decisions are still surrounded by puzzles for many years after the seminal paper by Modigliani and Miller (1958). Modigliani and Miller found that financing decisions and investing decisions were separating processes, and the strategy chosen by firms would influence the value of firms. Since Jensen and Meckling (1976) have proposed a hypothesis that there was an interaction between investing decision and financing decision, the opportunities to explore how a competitive strategy influenced capital structure become widely open. The choice of the firm’s capital structure is generally considered a central strategic issue, and Balakrishnan and Fox (1993) argue that strategic management can improve our understanding of the capital structure decisions.
Balakrishnan and Fox (1993) found that strategic application would explain in understanding capital structure in industries. The basic assumptions used in strategic management are that, in a certain industry, potential customers are heterogeneous in terms of needs and preferences so it will cause various customer segmentations. A firm that tries to satisfy or serve all market segmentations cannot treat or serve well for the whole customers (Porter, 1996). Thus far, there are various variations in conquering the market. A competitive strategy will lead to firm investment decision (Porter, 1996), and investment decision will influence financing decision chosen (Williamson, 1988). It can be concluded that different strategy chosen by firms will influence the variations of capital structure. The strategic argument of capital structure can explain “capital structure puzzle” in similar industries or in different industries. These arguments not only explain the variations among industries (Harris and Raviv, 1991) but also the variations of capital structures at the same industry.
This study tries to fill in the gap by using panel data in analysis of financing decision and apply the appropriate model. This study uses Indonesian data set to assess how competitive strategy (applied to innovator firms in their industry) will influence the capital structure taken by specific firms. The previous research found that intensive investment on R&D is associated with low leverage level since this investment creates intangible assets. This intangible asset cannot become collateral in obtaining debt (Santi, 2003; Vincente-Lorente, 2001; Simerly & Li, 2000; Rajan & Zingales, 1995, and Balakrishnan & Fox, 1993). In other words, firm investment intensity in R&D will influence the capital structure. Based on this argument, it can be...