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.
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Cuevas‐Vargas et al. (2022) studied this question.
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