FINANCIAL LITERACY, CULTURE AND LEVERAGE OF SMALL FIRMS

Abstract

This research examines the relationship between financial literacy and the leverage of small firms, specifically of the legal forms, sole proprietorships, and partnerships. We begin with a cross-section analysis of 73,302 firms in 22 countries and find that the leverage of small firms is negatively associated with financial literacy. Further, we explore the role of financial development, bankruptcy and transaction costs, and information asymmetry, in moderating the relationship. We find that the negative relationship is less pronounced in countries with lower financial development, high bankruptcy and transaction costs, and high information asymmetry environments, respectively. We extend the analysis to examine culture as a determinant of small business leverage using Inglehart's measure of sociological culture. Using panel data methods, specifically, system generalized methods of moments estimation on an unbalanced panel data 663,998 firm year observations, covering the period 2010 to 2019, we find that emancipative values and secular values are negatively associated with leverage. We also examine the role of financial literacy, bankruptcy protection, and information asymmetry as moderators of the relationship. Our results show that financial literacy negatively moderates the relationship between culture and leverage. Furthermore, bankruptcy environment and information asymmetry channels play a role in determining the extent of the culture-financial literacy impact on leverage. Our study offers policy implications for promotion of small and medium enterprises (SMEs) and entrepreneurship training and development. Finally, it contributes to the literature on capital structure, culture, financial literacy, and small firms.