Impact of Behavioral Biases on Financial Performance of SMEs and the Moderating Role of Financial Literacy; Evidence of Afghanistan
DOI:
https://doi.org/10.66635/wd4y8634Keywords:
Behavioral biases, financial literacy, financial performance, SMEs, AfghanistanAbstract
This study examines the effect of behavioral biases and the moderating effect of financial literacy on financial performance of SMEs in Afghanistan. This study adopted quantitative research design and primary data were collected from 300 SMEs in three provinces of Afghanistan namely Nangarhar, Helmand and Khost through structured questionnaire. The study employed exploratory factor analysis (EFA), correlation analysis, multiple regression and hierarchical regression to establish the effect of biases on the financial performance of SMEs. The study results indicated that overconfidence bias has a significant positive relationship with the financial performance of SMEs while the anchoring effect bias, herding behavior bias and the loss aversion has a significant negative relationship with the financial performance of SMEs. Among these, loss aversion was most strongly related to financial performance. The regression result also suggested that financial literacy has a significant impact in reducing the relationship between behavioral biases and financial performance. That is, it reduces the negative impact of behavioral biases. This study is one of the first to apply the concepts of behavioral finance to a fragile post-conflict setting and offers some suggestions for policy makers, financial institutions and business owners to improve the performance of SMEs by enhancing the financial literacy and awareness of their stakeholders.
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