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.