The moderating effect of family firms on the relationship between business sustainability and capital structure

Purpose This paper investigates the relationship between business sustainability and capital structure, specifically focusing on the moderating role of family firms. Design/methodology/approach Using a sample of Portuguese-listed firms on Euronext Lisbon from 2010 to 2022, the generalized method of moments (GMM) estimation was applied to account for endogeneity in panel data analysis. Findings The results show that family firms tend to have higher debt levels than their counterparts. While ESG performance positively influences financial leverage, there is no evidence that this effect is stronger for family firms. A nonlinear relationship between ESG and capital structure was found, suggesting that moderate ESG engagement enhances debt accessibility, whereas excessive levels may constrain financing options. Individually, the three ESG pillars do not significantly affect debt levels. However, specific sustainability components moderately influence the ESG-leverage relationship, particularly in family firms, where alignment with long-term values strengthens creditor confidence. Originality/value This study addresses the gap in understanding how family ownership moderates the ESG-capital structure relationship, particularly in civil law economies, where firms tend to rely more on debt financing and exhibit distinct governance and risk preferences. The findings contribute to the literature by revealing the nonlinear effect of ESG on capital structure and clarifying how family firm ownership influences the interplay between sustainability practices and financing decisions. These results offer valuable implications for investors, creditors and policymakers seeking to understand the financial behavior of family controlled firms in the context of sustainable business practices.