Re-Examining The Financial Literacy – SME Growth Nexus: Fresh Evidence from Causal Mediation Analysis

Selma Dzifa Addo; Joseph Asante; Emmanuel Mensah

doi:10.47747/ijbme.v4i3.1225

Authors

Selma Dzifa Addo Accra Institute of Technology, Ghana
Joseph Asante Accra Institute of Technology, Ghana
Emmanuel Mensah University of Professional Studies, Accra, Ghana

DOI:

https://doi.org/10.47747/ijbme.v4i3.1225

Keywords:

SME Growth, Financial Literacy, Risk Attitude, Causal Mediation Analysis, Ghana

Abstract

The importance of SMEs to the growth of emerging economies cannot be overemphasized. SMEs remain an important source of employment and economic growth for most developing economies. However, it has been found that, most SMEs in developing countries are unable to survive even up to their fifth year of operation due to a multiplicity of factors including the level of financial literacy and risk attitude of SME owners. The current study aims to examine the effect of financial literacy on SME growth mediated by the risk attitude of SME owners. The study’s data was collected from SME owners/managers in Ghana. 500 questionnaires were administered and out of the 432 retrieved, 400 were deemed useful for analysis using causal mediation. The study found a significantly positive association between financial literacy and SME growth in the main outcome model. Also, risk attitude was found to be positively related to financial literacy in the mediation model, whereas risk attitude further mediated the relationship between financial literacy and SME growth which demonstrates that risk attitude plays an intermediary role in the association between financial literacy and SME growth. Our results support the dual process theory of reasoning, according to which decisions made by entrepreneurs to improve the growth and sustainability of their businesses are influenced by two different systems of thought: the automatic unconscious system, which is based on their risk tolerance, and the intentional conscious system, which weighs numerous factors and models in light of their financial literacy.

Downloads

Download data is not yet available.

References

Ackah, J., & Vuvor, S. (2011). The Challenges faced by Small and Medium Enterprises (SMEs) in obtaining Credit in Ghana. [Master's Thesis, The Blekinge Institute of Technology].

Addo, S. D., Asantey, J., & Awadzie, D. M. The impact of financial literacy on risk propensity mediated by access to finance. Journal of Business Economics and Finance, 11(4), 195-205.

Addo, S. D., & Asante, J. (2023). The impact of financial literacy on access to finance: does risk attitude matter? International Journal of Business, Management and Economics, 4(1), 32-55.

Adomako, S., Danso, A., & Ofori-Damoah, J. (2015). The moderating influence of financial literacy on the relationship between access to finance and firm growth in Ghana. Venture Capital, 18(1), 43-61.

Amoah, S. K., & Amoah, A. K. (2018). The role of small and medium enterprises (SMEs) to employment in Ghana. International Journal of Business and Economics Research, 7(5), 151-157.

Aren, S., & Zengin, A. N. (2016). Influence of financial literacy and risk perception on choice of investment. Procedia-Social and Behavioral Sciences, 235, 656-663.

Asare, A. (2014). Challenges affecting SME’s growth in Ghana. OIDA International Journal of Sustainable Development, 7(06), 23-28.

Attrams, A. S., & Tshehla, M. (2022). Challenges of services sector SMEs in a developing country: A case of Ghana. Journal of the International Council for Small Business, 3(3), 228-236.

Baron, R. M. & Kenny, D. A. (1986). The moderator mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173-1182.

Buchdadi, A. D., Sholeha, A., & Ahmad, G. N. (2020). The influence of financial literacy on SMEs’ performance through access to finance and financial risk attitude as mediation variables. Academy of Accounting and Financial Studies Journal, 24(5),1-15.

Chen, H., & Volpe, R. P. (1998). An analysis of personal financial literacy among college students. Financial Services Review, 7(2), 107-128.

Cucculelli, M., & Ermini, B. (2012). New product introduction and product tenure: What effects on firm growth? Research Policy, 41(5), 808-821.

Damodar, G. (2004). Basic econometrics (4th ed.). NY: The McGraw-Hill.

Dahmen, P., & Rodríguez, E. (2014). Financial literacy and the success of small businesses: an observation from a small business development center. Numeracy: Advancing Education in Quantitative Literacy,7(1),1936-4660.

Emsley R., & Liu H. (2013). PARAMED: Stata module to perform causal mediation analysis using parametric regression models. In: Baum CF, ed. Statistical Software Components. Boston, MA: Boston College Department of Economics. https://econpapers.repec.org/software/bocbocode/S457581.htm.

Eresia-Eke, C. E., & Raath, C. (2013). SMME owners’ financial literacy and business growth. Mediterranean Journal of Social Sciences, 4(13), 397-397.

Fatoki, O. (2021). Access to finance and performance of small firms in South Africa: The moderating effect of financial literacy. WSEAS Transactions on Business and Economics,18, 78-87.

Fraenkel, J. R., Wallen, N. E., & Hyun, H. H. (2012). How to design and evaluate research in education (Vol. 7, p. 429). New York: McGraw-hill.

Frimpong, S. E., Agyapong, G., & Agyapong, D. (2022). Financial literacy, access to digital finance and performance of SMEs: Evidence from Central region of Ghana. Cogent Economics & Finance, 10(1), 2121356.

Ghana Statistical Service (2015). Integrated Business Establishment Survey Phase 1. https://www2.statsghana.gov.gh/IBES1.html

Hermansson, C. (2015). Relationships between bank customers’ risk attitudes and their balance sheets.

Hussain, J., Salia, S., & Karim, A. (2018). Is knowledge that powerful? Financial literacy and access to finance: An analysis of enterprises in the UK. J. Small Bus. Enterp. Dev. 25(6), 985–1003.

Han, L., Xiao, J. J., & Su, Z. (2018). Financing knowledge, risk attitude and P2P borrowing in China. International Journal of Consumer Studies, 43(2), 166-177.

Khan, M. A. (2022). Barriers constraining the growth of and potential solutions for emerging entrepreneurial SMEs. Asia Pacific Journal of Innovation and Entrepreneurship, 16(1), 38-50.

Kim, H. J., & Reinschmidt, K. F. (2011). Effects of contractors’ risk attitude on competition in construction. Journal of Construction Engineering and Management, 137(4), 275-283.

Korkmaz, A. G., Yin, Z., Yue, P., & Zhou, H. (2021). Does financial literacy alleviate risk attitude and risk behavior inconsistency? International Review of Economics & Finance, 74, 293-310. DOI:10.1016/j.iref.2021.03.002.

Kvaran, T., Nichols, S., & Sanfey, A. (2013). The effect of analytic and experiential modes of thought on moral judgment. Progress in Brain Research, 202,187-196. https://doi.org/10.1016/B978-0-444-62604-2.00011-3

Molchan, S. (2022). Importance of Developing Financially Literate Families and Communities: Opportunities for FCS Educators. Journal of Educational Research and Practice, 12(1), 7.

Mthiyane, Z. Z., van der Poll, H. M., & Tshehla, M. F. (2022). A framework for risk management in small medium enterprises in developing countries. Risks, 10(9), 173.

Mudzingiri, C. (2021). The impact of financial literacy on risk seeking and patient attitudes of university students. Development Southern Africa, 38(5), 845-861.

Nkuah, J. K., Tanyeh, J. P., & Gaeten, K. (2013). Financing small and medium enterprises (SMEs) in Ghana: challenges and determinants in accessing bank credit. International Journal of Research in social sciences, 2(3), 12-25.

Noack, D. (2008). Behavioral Risk Management. Diplomica Verlag.

Oláh, J., Kovács, S., Virglerova, Z., Lakner, Z., Kovacova, M., & Popp, J. (2019). Analysis and comparison of economic and financial risk sources in SMEs of the Visegrad group and Serbia. Sustainability, 11(7), 1853.

Pattillo, C., & Söderbom, M. (2000). Managerial risk attitudes and firm performance in Ghanaian manufacturing: An empirical analysis based on experimental data.

Potrich, A.C.G. & Vieira, K.M. (2018). Demystifying financial literacy: a behavioral perspective analysis. Management Research Review, 41(9), 1047-1068. https://doi.org/10.1108/MRR-08-2017-0263.

Waked, B. (2016). Access to Finance by Saudi SMEs: Constraints and the impact on their performance (Doctoral dissertation, Victoria University).

Widdowson, D., & Hailwood, K. (2007). Financial literacy and its role in promoting a sound financial system. Reserve Bank of New Zealand Bulletin, 70(2).

Willebrands, D., Lammers, J., & Hartog, J. (2012). A successful businessman is not a gambler. Risk attitude and business performance among small enterprises in Nigeria. Journal of Economic Psychology, 33(2), 342-354.

Wise, S. (2013). The impact of financial literacy on new venture survival. International Journal of Business and Management, 8(23), 30.

World Bank. 2009. Online Atlas of the Millennium Development Goals. Washington, DC: World bank.

Wüstermann, R. P. (2016). Do decision-makers in SMEs have higher risk aversion than in large enterprises? Zeitschrift für interdisziplinäre ökonomische Forschung (2), 72-78.

Yao, R., Hanna, SD & Lindamood, S. (2004). Changes in financial risk tolerance, 2001, 249-266.

Ye, J., & Kulathunga, K. M. M. C. B. (2019). How does financial literacy promote sustainability in SMEs? A developing country perspective. Sustainability, 11(10), 2990.