A Comparative Analysis of the Effects of Objective and Self-Assessed Financial Literacy on Stock Investment Return

Abstract

Till now, comprehensive and quantitatively meaningful analyses of stock market participation outcomes of retail investors have been limited by data sources in developing countries. This article devised a special questionnaire related to stock investment to measure the financial literacy (FL) and stock investment return (SIR) for the subjects with stockownership in China and to theoretically and empirically study the effects of objective FL, self-assessed FL, and their composite FL on SIR. The results of the comparative analysis showed that self-assessed FL has a greater effect on SIR than objective FL, and the effect is mediated by risk preference. In addition, we found that competent and overconfident respondents have higher SIR, while under confident respondents cannot gain from the stock market. We also found that risk preference has a positive mediating effect in the relationship between competence and overconfidence and SIR, and a negative mediating effect in the relationship between under confidence and SIR. We thus concluded that confident investors can gain more stockholding returns via taking more risks regardless of the level of their actual financial knowledge. Our findings would be a meaningful complement to the studies of stock market participation.

The importance of the comparative benchmark for measuring composite financial literacy with survey data

“…However, we only explore the different impacts of CFL measured with the two methods on stock market participation behavior. The other finical behaviors, such as retirement planning and investment decision, are also significantly affected by individuals’ CFL (e.g., Liao et al, 2022 ; Yeh and Ling, 2022 ; Seraj et al, 2022a , b ). Therefore, it could be intuitive to check whether the CFL measured by the two methods can produce different marginal effects for other specific financial behaviors in a particular survey data.…”

“…They prove that this combination could provide ‘more robust and nuanced insights’ about how FL affects credit card behaviors. Since the study of Allgood and Walstad (2013) , many studies use the CFL measured with the their method as a significant independent variable to explain individuals’ or households’ stock market participation ( Xia et al, 2014 ; Yeh and Ling, 2022 ), risky financial behaviors ( Asaad, 2015 ), financial advice usage ( Porto and Xiao, 2016 ), various financial behaviors ( Allgood and Walstad, 2016 ), investment fraud victimization ( Xiao et al, 2022 ), and stock investment return ( Liao et al, 2022 ). They all discover that the CFL can provide more insights and show a greater effect on financial behaviors or outcomes than OFL alone.…”