Unraveling the impact of financial literacy on investment decisions in an emerging market

Abstract

We examined the impact of financial literacy on investment decisions, taking a sample of 384 investors from India. A multi‐dimensional construct to measure financial literacy was developed basis the theory of planned behavior. Investment decisions were measured by taking six proxies on a five‐point Likert‐type scale. The causal link between financial literacy and investment decisions was examined using simple linear and binary logistic regression. The results exhibited moderate to high levels of financial literacy among investors. Results further confirm that investors' investment decisions are positively influenced by their financial literacy levels. It is concluded that financial literates have a greater likelihood of making informed investment decisions. These outcomes have practical implications for policymakers, managers, employers, and investors, especially in an emerging market context, making a case for relevant financial education programs to empower investors. The study adds to the theory of financial literacy developing a multi‐dimensional construct and introducing Macroeconomic Factors as a proxy for investment decisions.