How does society satisfaction affect the capital structure of firms? A two-part fractional regression approach

Abstract

<abstract> <p>This paper examined the influence of society satisfaction on the capital structure decisions of small and medium–sized enterprises (SMEs). Applying data from an online questionnaire, we captured the well-being and perceptions that individuals hold about their own quality of life through a latent variable measuring satisfaction with life. In addition, the study used a sample of SMEs from Portugal for the pandemic year of 2020. Using fractional regression models, our findings revealed a statistically significant relationship between society satisfaction and SMEs' leverage. Specifically, we showed that higher levels of satisfaction decrease debt levels among SMEs. However, further investigation, employing a two-part fractional regression model, showed that the overall negative effect is, in fact, only explained by the increasing propensity for firms to remain debt-free in the presence of greater levels of society satisfaction. Consequently, while society satisfaction appears to influence the decision to engage in debt financing, this does not significantly impact the amount of debt taken on by SMEs. In summary, this paper highlights the importance of society satisfaction to SME capital structure decision-making and contributes to a deeper understanding of the mechanisms driving SME financing decisions amidst socio-economic dynamics.</p> </abstract>