Behavioral factors, financial literacy and investment decisions among proprietors of small and micro enterprises in Nairobi county, Kenya

Abstract

Investment Decisions made by (SMEs) are crucial for economic development and are part of strategic decision-making in every enterprise because new investment projects essentially affect future economic results and the enterprise’s prosperity. However, wrong investment decision may lead to a loss in an organization. SMEs are facing challenges in making rational decisions based on low managerial skills, experiences, academic ability and sometime personal behavior which influence their judgment. There exist theoretical as well as conceptual gap that bring out both behavioural and financial literacy in relation to investment decision to reduce the problem associated with SMEs failure as result of irrational decision making. Therefore, this study sought to determine moderating effect of financial literacy on the relationship between Behavioural Factors and Investment Decisions among Small and Micro Enterprises in Nairobi County. The specific objectives of the study are to determine the effect of: Overconfidence, Anchoring, Prospecting and Herding on investment decision making; and to investigate the moderating effect of Financial Literacy on the relationship between Overconfidence, Anchoring, Prospecting, Herding and Investment Decisions among Small and Micro Enterprises. The study was premised on the Behavioural Portfolio, Regrets, Prospects, and Competency theories. Positivism paradigm was deployed. The study adopted explanatory research design. The target population of the study was 102,821 owners of SMEs in Nairobi County in Kenya. A sample of 383 respondents was selected using random sampling technique. Hierarchical multiple linear regression was used in inferential analysis and the findings revealed that anchoring (β= 0.118, p<0.05), Prospect (β = 0.269, p<0.05) and Herding (β =0.458, p< 0.05) had positive and significant effect on investment decision. Overconfidence factors had no significant effect on investment decision (β= 0.017,p>0.05).The study found that Financial Literacy had a buffering moderation effect on the relationship between Overconfidence and Investment Decision (β = .22, p<0.05, R 2 ∆ = .182), Anchoring and Investment Decisions (β = .23, p<0.05, R 2 ∆ = .018), Prospecting and Investment Decision (β = .23, p<0.05, R 2 ∆ = .014) and Herding and Investment Decision among SMEs in Nairobi County(β = .22, p<0.05, R 2 ∆ = .009). Thus, the Behavioural Factors enhance Investment Decisions among SMEs except for Overconfidence. In addition, Financial Literacy moderates the relationship between Behavioural Factors and Investment Decisions among SMEs. The study recommends that SMEs should provide financial training to employees and management to enhance financial literacy to achieve better Investment Decision. There existed very strong relationship between the dependent and independent variables as result of financial literacy. Financial literacy contributes to enhance of investment decisions in maximizing portfolio through financial literacy to improve investment decision. It also contributes more knowledge on prospect and competency theory as results of contribution of financial literacy to both prospect and herding factors respectively. Policy makers, government and manager are encouraged to improve financial literacy in SMEs through training so as to improve investment decision.