Emotional Contagion and Organizational Performance in MSMEs: A Structural Equation Modelling Approach

This study investigates the financial implications of emotional contagion within Micro, Small, and Medium Enterprises (MSMEs), emphasizing its influence on organizational performance, strategic behavior, and accounting decisions. Drawing on theories from behavioral economics and organizational accounting, we explore how shared emotional states among employees and managers impact financial indicators such as return on investment (ROI), employee turnover, budgeting efficiency, and overall revenue growth. A Structural Equation Modeling (SEM) approach was applied to analyze data from 250 respondents across Indian MSMEs. Additionally, we tested alternative mediation models to evaluate the robustness of observed relationships. Results show that emotional contagion significantly affects financial decision-making by influencing leadership clarity, employee morale, and risk behavior. Path coefficients indicated a strong link between positive emotional environments and increased budgeting accuracy, while negative emotional contagion was associated with reduced operational efficiency and higher cost overruns. The study contributes to a growing body of literature by reframing emotional phenomena as economic drivers in MSMEs. Policy implications include the need for emotional intelligence (EI) training, culture-sensitive audits, and leadership development programs designed to enhance financial resilience. Recommendations are also made for economic planners and MSME policymakers to integrate affective dimensions into performance management systems.