The effect of financial literacy on short-term and long-term investment decisions:

The mediating role of Risk-aversion

Abdul Saqib
Abdulsqb@gmail.com +923038781600

Abstract

Financial literacy is the individual basic understanding of financial concepts and basic money
management to make sound financial decisions. As financial literacy effect individual investment
behavior therefore, the purpose of this study is to investigate the effect of financial literacy on
short term and long-term investment decisions with mediating role of risk aversion. The
population of the study was the individual investors of Rawalpindi and Islamabad connected
with the help of Pakistan Stock Exchange, banks and insurance companies. Using convenient
sampling, a total of 250 structured questionnaires were distributed of which 153 are usable with
response rate of 61%. Multiple regression and correlation analyses were performed to draw the
results. The results reveal that financial literacy is positively associated with short-term and long-
term investment decisions further the results confirm the mediation of risk aversion among
financial literacy and investment decisions. These results suggest that financially literate
individuals are risk averse and probably engage in short-term investment decisions.

Keywords: Financial literacy; short term investment; long term investment; Risk aversion

1
Introduction

Each individual faced with trade-off between today and tomorrow consumptions. when there is

opportunity to sacrifice today low consumption for tomorrow higher consumption the rational

individual will exploit it. This increase in tomorrow consumption is only possible with the

existence of production facility or investment market. If the marginal rate of transformation is

higher than the marginal rate of substitution then investor will go for investment otherwise he

will either consume or save. If he decided to invest then the decision to be taken that whether to

invest in short term or long-term investment horizon. The decision to invest in different horizons

based on multiple factors such as investor personal characteristics, macro and micro economic

variables. In this study we are studying the individual personal characteristic financial literacy

effect on his selection to invest in short term or long-term instruments. Financial literacy can be

defined as “the ability of people to make financial decisions in their own best short- and long-

term interests” (Mandell 2008). Financial literacy is the individual ability to understand financial

institutions, basic money management, and able to make sound financial decisions. Recently

different surveys are conducted by different groups like governments, financial markets,

suppliers, agencies, employers and other organizations to measure financial literacy level.

Financial literacy is a key element in financial decision making and well-being, which may affect

all areas of our lives and this Inadequate level of financial literacy is a global problem (Amari &

Jarboui, 2015). The importance of financial literacy increased due to wide variety of new and

existing financial products, the complexity of financial markets, and changes in economic

variables, demographics and social patterns. The 2008-2009 global economic crises boost the

importance of financial literacy. A study conducted in 12 countries including some Asian and

European countries by OECD (2005) revealed that the literacy level of the participants is very

2
low. A study on 924 US college students, results show that financial literacy level of individuals

different with different level of personal characteristics. Further, the study express that US

students have more knowledge of financial products then foreigners, and men are more literate

than women.

The studied literature suggests that there is significant association between financial literacy and

investment decisions. Further it is obvious that the investor literacy level effect his perception

and final investment decisions. Investor with high financial literacy tend to invest in short term

instruments while investors with low financial literacy level may accept higher risk and invest in

long term securities. The individual understanding and knowledge of financial instruments and

risks and rewards associated to them, may lead individuals to engage in investment decisions.

The people higher financial literacy level has positive relationship with better investment

portfolios, especially investment decisions (Lusardi, Michaud, & Mitchell, 2013). Short term

instruments mostly convert to cash or kind in one year while long-term investments are for more

than one year. Short term and long-term instruments have different risks and rewards. The

decision to invest in money market or capital market based on individual perception, resource

strength and financial literacy level. Individuals with low level of financial literacy need

financial advice in their investment decisions (Chu, Wang, & Xiao, 2016). Individuals who are

financially sophisticated tend to invest more aggressively (Calvet, Campbell, &Sodini, 2007). A

study by Bashir and Nisar (2013) conducted on 110 stock market investors using probability

sampling. The findings show that expected return and financial literacy have significant effect on

short term investment decisions. Moreover, results suggest that individuals with higher past

experience have intention to participate in short term investment. Similarly, another study by

Akhtar, Hunjra, and Rehman (2011) on 185 stock market participants. The findings express that

3
openness to experience and financial literacy have significant effect on short term and long-term

investment decisions.

Investment decision is an important element of capital market. Upward and downward

movement of capital market is also caused by investment decision of investors. But investment

decision itself depends on inbuilt risk with investment. There is a deep relationship between risk

and investment decision making. Risk plays an important role in investment decision making

(Forni, & Mullins, 2000). Many researches have been done on investment decision making.

Good investment decisions provide satisfaction and improve life's quality (Sahi, Arora, &

Dhameja, 2013). Individuals are appreciated for their own financial investment decision, but it

affects individual as well as the whole society (Dolan, Elliitt, Metcalfe, &Vlaev, 2012). Decision

and behavior are influenced by the risk, it observed that there is difference between risk

perception and actual risk accrue (NorDgren, Pligt, & Harreveld, 2007). Olsen (2012) reported

that ''Without trust, group effort cannot help to manage risk''. A positive relationship between

risk and return assure high return on investment (Walia, Kiran,2012). For thousands of years

people have been making investment decisions, these decisions involve risk as some investments

pay off and some do not (Bailey & Kiserson, 2005). Only recently have people begun to

effectively manage their exposure to risk. By the middle of the seventeenth century, there was

growing trade and commerce such that wealth was no longer primarily “inherited from preceding

generations; now it could be earned, discovered, accumulated, invested, and protected from loss”

Bernstein (1998, p.89). Malkiel (1996) argues that, for individuals, assessing capacity for and

attitude toward risk is the key to successfully implementing an investment policy. To understand

financial matters minimum level of financial literacy is required. The individuals who’s are

financial illiterate may not be able to analyze the risks and rewards associated to financial

4
products to take investment and consumption decisions. A study conducted by Parbha and

Pandian (2016) in Pollachi an Taluk on 172 married women’s. The results show that women are

financially less literate than men and are mostly risk avoiders. Further, their results confirm the

relationship between risk tolerance and financial literacy. Moreover, women with lower level of

financial literacy will less likely involve in retirement planning and are risk intolerant (Lusardi &

Mitchell, 2008). Risk aversion is the investor reluctance who when faced with two investment

choices of same expected return (but have different risks) will go for low risk investment choice.

Risk aversion is the individual avoidance of uncertainty. Peoples can be risk takers, risk averse

or neutral. According to economic theory, risk aversion is the general characteristic of utility

function of money (Warneryd, 1996). Individuals with higher level of financial literacy tend to

make investments in mutual funds, less risky investments, whoever individuals who are

overconfident about their financially literacy were make investment in stocks, risky investments

(Chu1, Wang, Xiao, & Zhang, 2016). Peoples are ready to pay more in insurance than expected,

while on the other hand they do so in lottery tickets. Risk aversion increases with the amount that

are at stake in risky instruments (Binswanger, 1986).

Our model underpinning theory is prospect theory, which describes that when an individual is

faced with two alternatives of equal choice will go for perceived gains instead of perceived

losses, also it is known as loss-aversion. The logic behind of support to our model is that investor

who is risk averse will accept low return with minimum uncertainty instead of high return with

high uncertainty.

As by reviewing the previous research studies such links are studies like financial literacy and

investment decisions of UAE investors is studied by (Al-tamimi and kalli, 2009) and financial

literacy, portfolio choice and financial well-being by (Chu1, Wang, Xiao, & Zhang, 2016) and

5
analysis of financial literacy level of retail individual investors of Gujarat state and its effect on

investment decision by (Jariwala, 2015). Further studies are financial literacy, risk aversion and

choice of mortgage type by households (Cox & Brounen, & Neuteboom, 2014). As the link exist

between financial literacy, risk aversion and investment decisions therefore we are testing such

relationship in this study, by taking risk aversion as mediator to the effect of financial literacy on

investment decisions.

Research Questions:
The present study is intended to find out the answers of the following questions.

1. Does financial literacy effect short and long-term investment decisions?

2. What is the effect of financial literacy on risk aversion?

3. What is the effect of Risk aversion on investment decisions?

4. Does risk aversion mediate the relationship between financial literacy and investment
decisions?

Significance of the study:

This research is comparatively and hypothetically a novel contribution to existing body of

knowledge. The purpose of the study is to investigate the effect of financial literacy on

investment decisions with mediating role of risk aversion on investment decision making

behavior of weather investor financial behavior is based on knowledge of financial concepts and

risk tolerance level. Investors use different ways to find out that decisions which are associated

with risk or uncertainty. In investment decision making, investor should have complete

information about risk related with investment (Pervez, 2014). Investors use different ways to

avoid risk and uncertainty (Ball, 2002). They prefer high return with a lower risk (Lamp,

Lévesque, & Schade, 2012). Firms use risk management tools in investment decisions making

6
process (Jackson, 2010). Some investors are risk taker and some are risk averse. High risk taker

gains high return (Brunner, Hu, Oechssler, 2014). The study suggests that with increase of

investment horizon individual tends to be more risk tolerant (Siebenmorgen& Weber, 2010).

Before investment investor evaluates risk and return of all investment alternatives (Zeelenberg

and Dijk, 1997). Culture and ethics are also influenced investor’s decisions (Willson, Et, al

2014). Demographics and personality are also influenced investor's risk tolerance (Filbeck,

Hatfield, & Horvath, 2010). The findings will explore whether investment behavior is based on

financial literacy level and risk aversion. This research will also support to the previous

researches either this financial literacy influences the investor shot-term and long-term

investment behavior or could the effect be through risk aversion and also this research important

with the cultural context of Pakistan. Because previous researches conducted on investment

decisions does not check the association of investment decisions with financial literacy level as

well as with the moderation effect of risk aversion.

7
Literature Review

Financial literacy:
Financial literacy is the individual ability and basic understanding of financial institutions

and concepts, basic money management, and able to make sound financial decisions. A study

conducted by Volpe, Kotel, and Chen, (2002) on 530 online investors. The results confirmed that

financial literacy level different with individual experience, age, gender, income level, education.

Specifically, they identified that middle age and men participants are more literate financially

than younger and women participants. Moreover, online investors possess more financial

knowledge than normal investors. As well, investors with higher degree and income level were

more knowledgeable and better financially performed than investors of lower degree and income

level. A national adult financial literacy survey made by ACNielsen Research (2005) in

Australia. The results of the survey indicate that higher level of financial literacy linked with

higher education level, employment, and skills. Moreover, the results show that less experience,

low income, unmarried, and those at the extremes of age profile were financially illiterate.

Hussein, Al-Tamimi and Kalli conducted a study on UAE investors to assess their financial

literacy. The results show that financial literacy level of UAE investors is far lower than required

level. Moreover, the study revealed that individuals working in banks and accounting firms have

higher level of financial literacy. Their results show that individuals literacy level was exist

irrelevant to age but significantly associated with gender, women’s have lower level of financial

literacy than men. Specially, their results show that there is significant relationship between

financial literacy and investment decisions. They concluded that religious factors significantly

affect investors investment decisions. Many Africans have sufficient economic resource strength,

8
but mostly they are unable to convert them into market opportunities (Abubakar, 2015). The

literacy level is different among different individuals due to variety of reasons. Therefore, we are

going to assess the effect of financial literacy on investment decisions.

Financial literacy and investment decisions:

A study by Bashir and Nisar (2013) conducted on stock market investors which he used

probability sampling technique. The results show that financial literacy, expected return and

accounting information have significant effect on short term investment decisions. Moreover,

results recommend that peoples with higher past experience have to participate in short term

investment decisions. Peoples who have low level of financial literacy required financial

suggestions in their investment decisions (Chu, Wang, & Xiao, 2016). Peoples who are

financially strong try to invest more aggressively (Calvet, Campbell, &Sodini, 2007). The ability

to understand of financial instruments and risks and returns engage individual in financial

decisions making. The people who have higher financial literacy level has positive impact with

better investment portfolios (Lusardi, Michaud, & Mitchell, 2013). As well results explain that

individuals with higher educational qualifications are more involve in short term investment as

compare to investors of other qualifications. Neuteboom (2014) studied that how financial

literacy and reported willingness to adopt financial risk impact a household’s mortgage choice.

The findings reveal that households reporting higher financial literacy and risk aversion are go

more likely for interest-only mortgages. Arorraand and Marwaha (2014) studied the perception

of 241 individual investors, in the Indian state of Punjab through structured questionnaires,

toward investing in stocks or fixed deposits. The findings express that stocks have high returns,

deposits have stability of income. Specifically, the results show that religious beliefs and

financial literacy influence individual investment decisions. Behavioral agency model explain

that family firms makes less investment in R&D, long-term investments, than non-family firms.
9
As family firms are more risk averse and investment in R& D is the indication of long-term

investments. The research by James, Chrisman, and Pankaj (2012) on 964 publicly held family

and non-family firms confirmed that family firms are less likely make investment in R&D as

compare to non-family firms. A study by Jariwala (2015) examine level of financial literacy of

retail investors in the state of Gujarat, India and its effect on investment decision. The

performance test and questionnaire are used for data collection and linear regression analysis for

data analysis. The results found that financial literacy significantly effects the investor

investment decision. Based on the existing studied we are going to extend the current body of

knowledge by studying the effect of financial literacy on short-term and long-term investment

decisions.

Hypothesis 1: Financial literacy influence investors behavior to participate in short term

investment.

Hypothesis 2: Financial literacy influence investors behavior to participate in long-term

investment.

Financial literacy and Risk aversion:

Financial literacy is the individual’s knowledge of understanding basic financial concepts and

money management to make efficient investment decisions. In every financial product and

market risk and return exist. To understand such financial matters minimum level of financial

literacy is required. The individuals who’s are financial illiterate may not be able to analyze

associated risks and rewards. Secondly, Risk aversion is the investor reluctance who when faced

with two investment choices of same expected return (but have different risks) will go for low

risk investment choice. A study conducted by Parbha and Pandian (2016) confirm the

relationship between risk tolerance and financial literacy. Likewise, a study by Chu1, Wang,

Xiao, and Zhang (2016) state that individuals with higher level of financial literacy tend to make
10
investments in mutual funds, less risky investments, whoever individuals who are overconfident

about their financially literacy were make investment in stocks, risky investments. Thus,

investors are varied in risk-aversion with vary degree of financial literacy. Therefore, we

hypothesis that financial literacy influence investors risk aversion.

Hypothesis 3: Financial literacy effect individuals risk-aversion level.

Risk aversion and investment decisions:

Some empirical research studies report that there is strong association between

individuals risk tolerance and investment decisions. We argued that investors who are risk averse

will probably engage in short term investment while on the other hand risk taker individuals will

go for long term investment. Long term investments are riskier due to high liquidity and default

risk, further the long-term investment should also accommodate high maturity premium, means

higher return than short-term. The behavioral intention can indicate the people willingness to

participate in some investment behavior, short term or long-term (Ajzen& Fishbein, 1980). The

individual bonds and cash holding express that individual is risk averse (Grable & Lytton, 2003).

In contrast, Keller and Siegrist (2006) found that stock investment raised more financial gains

and long-range capital growth, because of long time period. The equity risk premium is the

primary source of decision to participate in stock market (Brown, Veld, &Merkoulova, 2017).

Jamil and Baz (1999) examine that how short run and long run decision making may determine

risk taking and perception. Their finding shows that short and long-term investment decision

determine the individuals risk and perception. In addition, individuals with different personality

traits are varied to participate in investment as well different to engage in short or long-term

investment decisions. A study by Mayfield, Perdue, Wooten (2008) examine the relationship of

Big five personality traits to both long-term and short-term investment intentions using structural

equation modeling (SEM). They show that people of extraverted trait are engage in short-term
11
investment, on the other hand individuals who are higher in risk aversion and neuroticism avoid

this activity. Specifically, the risk averse individuals were not involved in long term investment.

In addition, openness to experience individuals were mostly engage in long-term investment.

Investors use different ways to deal with decisions which are associated with risk or uncertainty.

In investment decision making, investor should have complete information about risk related

with investment (Pervez, 2014). Investors use different ways to avoid risk and uncertainty (Ball,

2002). They prefer high return with a lower risk (Lamp, Lévesque, & Schade, 2012). Firms use

risk management tools in investment decisions making process (Jackson, 2010). Some investors

are risk taker and some are risk averse. High risk taker gains high return (Brunner, Hu, &

Oechssler, 2014). Individuals have different attitude and behavior regarding uncertainty and risk,

some are loss avert and hesitate to make participation in risky assets (Barberis, Huang, & Thaler,

2006).The study suggests that with increase of investment horizon individual tends to be more

risk tolerant (Siebenmorgen & Weber, 2010). Before investment investor evaluates risk and

return of all investment alternatives (Zeelenberg & Dijk, 1997). Culture and ethics influenced

investor’s decisions (Willson, Et, al 2014). Demographics and personality also influenced

investor's risk tolerance (Filbeck, Hatfield, & Horvath, 2010). With respect to finance theory low

risk tolerance households, up to some degree, directly or indirectly, should tend to engage in

stock market, risky investments (Campbell, 2006). WaErneryd (2001) explains that individuals

risk taking behavior is relative to his involvement in high risky, medium, and short risky

instruments. Low risky assets are associated with checking and saving accounts while high risky

assets associated with trading in derivatives and shares. Investors who are ready to bear high risk

are prepared to invest in stocks (WaËrneryd, 2001; Clark-Murphy and Soutar, 2004; Wood and

Zaichkowsky, 2004). Keller and Siegrist (2006) examined different factors that affect decisions

12
to invest in shares, these factors include income level, risk tolerance level, and the availability of

investment account. These factors have direct positive association with individual preparedness

to invest in stock. Investments in stock generate high returns, capital gain and dividend, in

comparison to bonds (Mehra & Prescot,1985). The stock value is directly associated with firm

performance and market volatility and riskier than bond. Bonds values are pre-settled and usually

generate stable cash flows. A recent study by Aren and Zengin (2016) shows that risk averse are

mostly go for deposits while high risk takers individuals prefer to engage in equity, foreign

exchange and portfolio. The study by Mayfield, Perdue, and Wooten (2008) shows that risk-

averse individuals do not involve in long term investment. Based on the literature search it

is identified that association exist between risk aversion and investment decisions, both short-

term and long-term.

Hypothesis 4: The greater individuals are Risk-averse the more likely they will engage in short-

term investments.

Hypothesis 5: The individuals risk-aversion has negative effect on Long-term investments.

Financial literacy, risk aversion and investment decisions:

To understand financial matters minimum level of financial literacy is required. The

individuals who’s are financial illiterate may not be able to analyze the risks and rewards

associated to financial products to take investment and consumption decisions. A study

conducted by Parbha and Pandian (2016) in Pollachi an Taluk on 172 married women’s. The

results show that women are financially less literate than men and are mostly risk avoiders.

Further, their results confirm the relationship between risk tolerance and financial literacy.

Moreover, women with lower level of financial literacy will less likely involve in retirement

planning and are risk intolerant (Lusardi & Mitchell, 2008). Individuals with higher level of

13
financial literacy tend to make investments in mutual funds, less risky investments, whoever

individuals who are overconfident about their financially literacy were make investment in

stocks, risky investments (Chu1, Wang, Xiao, & Zhang, 2016). Peoples are ready to pay more in

insurance than expected, while on the other hand they do so in lottery tickets. Private investors

do not choose investment just to increase the present value of expected return but they choose

investments to maximize present value of returns that are completely adjusted for risk (Kenneth

& Robert, 1970). Individuals gender, number of dependents, marital status, income and age are

significantly associated with risk tolerance level (Hallahan Et al., 2004). As the link exist

between financial literacy, risk aversion and investment decisions therefore we are testing such

relationship in this study, by taking risk aversion as mediator to the effect of financial literacy on

investment decisions.

Hypothesis 6: Risk aversion mediates the relationship between financial literacy and short-term

investment decisions

Hypothesis 7: Risk aversion mediates the relationship between financial literacy level and long-

term investment decisions.

Conceptual Framework:

Long-term investment

Financial Literacy Risk-Aversion

Short-term investment
14
Research Methodology

The current research study deals with quantitative aspects of the topic. And this is a cross

sectional study, in this section complete methodology is discussed. The survey was conducted by

implementing instruments adopted of different authors. This research is based on primary data

and statistical tools are used to analyzed the data. This section consists of population, sample,

reliability analysis, instrumentation and One-Way ANOVA.

Population and Sampling:

The population of our study is Rawalpindi and Islamabad investors. The investors are targeted

because our study analyzing investors financial literacy level and its effect on short and long-

term investment decisions with the mediation of risk aversion.

Sample size of this study is 153 respondents who are involve in some investment activities. The

sample was selected by using convenient sampling technique due to hard to find investors and

time constraint. Structured questionnaires were used to collect data from this sample. The

questionnaires were distributed among the investors at PSX and other financial institutions.

Among the respondents 250 questionnaires were distributed from which 170’s was returned and

153 are usable, the response rate is calculated as 61%. The questionnaires were slightly changed

in wordings but use as it is in English because it was not necessary to translate.

Sample Characteristics:
Sample characteristics are presented in below tables.

15
Table 1

1.2.1. Gender

Frequency Valid Percent Cumulative percent

Male 104 67.9

Female 49 4 100.0

Total 153 100.0

The above table shows investors composition on the basis of their genders in which 45.8% were

female and remaining 54.2% were male in cumulative 100%.

Table 2

1.2.2. Age distribution:

Frequency Percent CP

18-25 76 49.7 49.7

26-33 48 31.4 81.0

34-41 17 11.1 92.2

42-49 10 6.5 98.7

50 above 02 1.3 100.0

Total 153 100

Table 2 express the sample categorized on the basis of age distribution. 49.7% of the respondents

were in 18-25 years age range, 26-33 age range respondents were 31.4% in numbers while

16
11.1% individuals were in 34-41 years, the 6.5% respondents were 42-49 years old and just 1.3%

were above 50 years old.

Table 3:

1.2.3. Respondents Qualification

Frequency Valid Percent Cumulative percent

Metric 2 1.3 1.3

Bachelor 46 30.1 31.4

Master 32 20.9 52.3

MS/MPhil 65 42.5 94.8

PhD 8 5.2 100.0

Total 153 100

The above given table explore respondents on the basis of their Qualification. Metric qualified

respondents were 1.3%, 30.1% respondents were Bachelor qualified, masters qualified

individuals were 20.9%, major part 42.5% were MS/MPhil qualified while only 5.2%

respondents.

Table 4:

1.2.4. Respondents Work Experience

Frequency Valid Percent Cumulative percent

0-5 93 60.8 60.8

06-13 34 22.2 83.0

14-21 15 9.8 92.8

22-29 07 4.6 97.4

30 and above 4 2.6 100.0

17
 Total 153 100

Table 4 represent that (60.8 %) of the respondents have work experience within a range of (0-5)

years, (22.2%) of the respondents have work experience within a range of (6-13) years, (9.8%) of

the respondents have work experience within a range of (14-21) years, (4.6%) of the respondents

have work experience within a range of (22-29) years, (2.6%) of the respondents have work

experience more than 30 and above.

Table 5:

1.2.5. Respondents income level

Variables Percentage Cumulative Percent

Less than 40,000 49.0% 49.0

40,000-70,000 24.2% 73.2

70,000-100,000 11.8% 85.0

100,000-130,000 8.5% 93.5

130,000 and above 6.5% 100.0

Total 100

The above table 5 shows that 49,0% were less than 40,000 and 24.2% were 40,000-70,000 and

11.8% were 70,000-100,00 and 8.5% were 100,000-130,000 and 6.5% were above than 130,000.

Measures and Scales:

The used questionnaire in this study was adopted and slightly modified to make it easy to

understand. The questionnaire used will measure four variables responses, on five-point Likert

scale ranging “from strongly Disagree and Strongly Agree” in the scale 1=Strongly Disagree,

2=Disagree, the 3= Not agree nor disagree, and 4= Agree while 5= Strongly Agree. The variable

was taken from more than one source.

18
Short term investment decisions:
Short-term investment decisions questionnaire developed by Mayfield, Perdue and Wooten

(2008) this measurement tool consists of 5 items like “I intend to compare my portfolio

performance to that of professional managers”. In this study the internal consistency of this scale

is (0.708).

Long-term investment decisions:

Short-term investment decisions questionnaire developed by Mayfield, Perdue and Wooten

(2008) this measurement tool consists of 5 items like “I intend to have a portfolio that focus on

multiple asset classes”. In this study the internal consistency of this scale is (0.692).

Financial literacy:
In this study to measure respondent’s literacy level the instruments developed by Mayfield,

Perdue and Wooten (2008) was used that have 14-items like “I usually follow stock market

through financial newspapers every week”. (0.803) was the reliability of this measure in current

study.

Risk Aversion:
For measuring risk-aversion the measure developed by Gomez-Mejia and Balkin (1989) was used

on five-point Likert scale to know investors risk tolerance level. This measure has 4-items the

sample is “I am not willing to take risk when choosing a stock or investment”. The reliability of

this risk aversion measure is (0.61).

19
 Control variables:
One-Way ANOVA was used in the study to control the variation in results of short-term

investments and long-term investments due to demographics variables. One-Way ANOVA

shows high differences in our first dependent variable Short-term investment across

Qualification (F=2.7, p<0.03), experience (F=5.9, p<0.00) and income level (F=4.6, p<0.00).

while there are no significant differences were found for gender and age. Similarly, results of

One-Way ANOVA show significant differences in second variable of interest Long-term

investment decisions due to demographics variables. The variation in results observed across

Qualification (F=2.6, p<0.04) and income level (F=4.9, p<0.00). while no significant differences

were found for Gender, age, and experience.

Table6: One-Way ANOVA

Sources of Variation F Statistics p-Value F Statistics p-Value F Statistics p-Value

STI
Gender 0.51 0.47 0.03 0.87 1.6 0.21

Age 0.46 0.76 1.3 0.26 0.93 0.44

Qualification 2.7 0.03 2.6 0.04 2.9 0.02

Experience 5.9 0.00 1.9 0.10 1.7 0.13

Income level 4.6 0.00 4.9 0.00 3.8 0.00

LTI RA
N=153, STI= Short-term investment decisions,

LTI= long-term investment decisions, RA=Risk aversion.

p-Value= Significance level.

20
Results

The variables mean, standard deviations, correlation matrix and reliabilities alpha are expressed

in below table2.

Tab7:

4.1. Means, Standard Deviations, Correlations, and Reliabilities

Mean S.D. 1 2 3 4

1.FL 3.22 0.63 (0.80) - - -

2. RA 3.27 0.77 0.27** (0.63) - -

3. STI 3.21 0.79 0.45** 0.26** (0.71) -

4. LTI 3.60 0.71 0.55** 0.27** 0.46** (0.70)

N=153, Reliability Alpha is expressed in Parentheses, FL= Financial literacy, RA= Risk-

Aversion,

STI= Short-term investments, LTI= Long-term Investments. *= Significant,

**= Highly Significant.

The table indicates that Financial literacy has direct positive correlation with Short-term

investment decisions (0.45, p<0.000) and Long-term investment decisions (0.55, p<0.000) which

support our first two hypothesis. The results also support that there is moderate significant

positive association of risk-aversion with short-term investments (0.26, p<0.001), long-term

investments (0.27, p<0.001) and mediator risk aversion (0.27, p<0.001) which supports our other

hypothesis except fifth hypothesis (0.55, p<0.000) which state that financial literacy negatively

affect long-term investment decisions. Other than this one hypothesis is in line with theory and

previous research findings.

21
Table:8

4.2. Regression analysis:

Short-term Investment Long-term investments

β p-Value R² β p-value R²

FL 0.459*** 0.000 0.21** 0.554*** 0.000 0.307**

RA 0.264** 0.001 0.070* 0.274** 0.001 0.075*

N=153, FL=financial literacy, RA=Risk aversion, *= slightly Significant, **=significant,

***=Highly significant. P-Value= significance level.

The linear regression analysis was used to test the main effect of the variables. In table 3 the

regression results are expressed. The results show that Financial literacy have significant positive

impact on short-term investments (β= .46, p<.000) which support our first hypothesis. The effect

of Financial literacy on Long-term investment decisions were found (β= .55, p<.000) so our

second hypothesis is also supported. The results indicate that financial literacy influence

individuals risk-tolerance level (0.27, p<0.001) thus third hypothesis is supported. The analysis

further indicates that Risk averse individuals will more likely engage in short term investment

decisions (β= 0.26, p<0.001) so our fourth hypothesis is supported. Further the results show that

risk aversion have positive impact on long-term investment decisions (β= 0.28, p<0.001) so our

5th hypothesis is not supported.

22
Discussions

The results of empirical analysis support most of our hypothesis. As our first hypothesis

proposed that financial literacy level influence individual’s behavior to participate in short term

investments has supported with empirical results. As the literature suggest that the individuals

with high financial literacy are more concern with the combination of risk and return which leads

that they will involve in less risky investments as short term, low liquidity and default risk

significant positive effect has confirmed of financial literacy on short term investment decisions.

Supported with the literature as investors with high financial literacy are aggressive to invest. A

study by Jariwala (2015) examine level of financial literacy of retail investors in the state of

Gujarat, India and its effect on investment decision the results found that financial literacy

significantly effects the investor investment decision. Neuteboom (2014) findings reveal that

households reporting higher financial literacy and lower risk aversion are go more likely for

interest-only mortgages. The behavioral intention can indicate the people willingness to

participate in some investment behavior (Ajzen& Fishbein, 1980).The findings of Jamil and Baz

(1999) examine that how short run and long run decision making may determine risk taking and

perception.

The results confirmed that financial literacy influence individuals risk-tolerance level. Based on

the literature it can be argued that individuals with high financial literacy level and amount at

stake tend to engage in less risky investments and more likely go for financial advice rather than

self-management. Risk aversion is the avoiding behavior from the side of the investor, who when

saw two investment options of same expected return will go for low risk investment option.

Peoples who have higher level of financial literacy tend to make investments in mutual funds,

23
less risky investments, whoever peoples who are overconfident about their financially literacy

were make investment in stocks, risky investments (Chu1, Wang, Xiao, & Zhang, 2016).

Future directions and limitations:

This current research has a strong methodological design. firstly, the data was collected from

more than one institutions as well from PSX. Secondly, the collected data have good indication

of reliability and validity. For the reliability checking SPSS was used.

There is some limitation in the current study, first we took only one mediator risk-aversion due

to time constraint but future researches may use other individual’s behaviors as mediators.

Secondly, the current study is cross-sectional but future studies may use time lag data. In

addition, the data is collected from only investors of just two cities further studies may use data

from diverse sample. Further, we focused on short instruments for measuring the variables due to

convince and its administration. Further studies may be conducted in other cultures context.

Lastly, in the current collected data there is more biases because of low financially literacy level

in Pakistan.

Conclusion:

This is a frontrunner study that examines these independent, dependent, and mediator variables

instantaneously in a single model, and therefore improves our understanding by demonstrating

the joint effects, the goal of the study to find out the impact of the financial literacy on

investment decisions making with mediating role of risk aversion, in order to find results

objectivity we distribute 250 questionnaires from which 170 collected and considered 153 for

statistical analysis, the result of the study H1, H2, H3 and H4 is supported and H5 which is the

individual risk aversion has negative effect on long-term investment decisions does not

24
supported. We discussed all the justifications for the hypothesis acceptance and rejection and

also discussed the practical and theoretical implication of the study.

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29
 5. Appendices

5.1. Appendix A
Survey Questionnaire
Dear Respondent,
We are students of MS Management Sciences at Capital University of Science and Technology
Islamabad. we are conducting a research on “The effect of financial literacy on long-term and
short-term investment decisions: The mediating role of risk aversion” as a partial
requirement of our degree. You can help us voluntarily by completing this questionnaire, which I
think you would find interesting. It will take about 10-12 minutes of your precious time. If for
any reason you not ready to participate please feel free to decline. The findings from this survey
will be purely used for academic purposes and the answers you provide will be kept confidential
and cannot be disclosed to anyone. If you wish to be informed of the findings of this study, the
findings will be shared with you as a report discussing aggregated results only. Your cooperation
will be highly appreciated in this regard.
Please read the instructions carefully and answer all the questions. There is no right or wrong
question, please answer all the questions on the basis of your understanding.
Sincerely,
MS Management Sciences students
Department of Management and Social Sciences
Capital University of Sciences and Technology, Islamabad
Abdulsqb@gmail.com

Section 1: Short-term investment intentions

Please insert a check mark (√) in the appropriate column to indicate whether you agree or disagree with each of the
following statements:
1 2 3 4 5
Short-term investment intentions Strongly Disagre Not Agree Strongly
Disagree e Sure Agree
STI1 I intend to invest in an IRA (individual retirement Account)
every year.
STI2 I intend to put at least half of my investment money into the
stock market.
STI3 I intend to engage in portfolio management activities at least

30
 twice per week.
STI4 I intend to perform my own investment research instead of
using outside advice.
STI5 I intend to compare my portfolio performance to that of
professional managers.

Section 2: Long-term investment intentions

Please insert a check mark (√) in the appropriate column to indicate whether you agree or
disagree with each of the following statements:
Long-term investment intentions 1 2 3 4 5
Strongly Disagre Not Agree Strongly
Disagree e Sure Agree
LTI I intend to save at least 10% of my gross earnings for
1 investing/saving/ retirement purposes.
LTI I intend to have a portfolio that focuses on multiple asset
2 classes (i.e., stocks, bonds, cash, real estate, etc.).
LTI I intend to take an investments course.
3
LTI I intend to manage my portfolio for maximum gross return
4 rather than tax and cost efficiency.
LTI I intend to invest some money in long-term assets where my
5 money will be tied up and inaccessible for years.

Section 3: Financial Literacy

Please insert a check mark (√) in the appropriate column to indicate whether you agree or disagree with each of the
following statements:
Financial Literacy 1 2 3 4 5
Strongly Disagre Not Agree Strongly
Disagree e Sure Agree
FL1 I am somewhat knowledgeable of stock market activities on
the KSE
FL2 I usually follow the stock market through financial news on
TV at least twice a week
FL3 I usually follow the stock market through financial
newspapers every week
FL4 I clearly understand the role of brokerage firms in listing on
the KSE
FL5 I easily access the latest reports, prospectus and financial
statements of any company on the KSE annually
FL6 I always have trust when trading on the KSE

31
FL7 I usually attend seminars, conferences & workshops hosted
by the KSE at least 3 times a year
FL8 I usually visit the KSE website (at least every 3 months)

FL9 KSE often holds educational programs to sensitize the public

on a quarterly basis
FL1 My peers influence my participation on the stock market
0
FL1 Companies listed on the KSE publish financial statements
1
more frequently (every 3 months)
FL1 When seeking financial advice, I deal with licensed brokers,
2
intermediaries or financial services companies
FL1 KSE gives reports on corporate developments of various
3
companies listed on a timely basis
FL1 I have trouble in paying attention to the information on the
4
stock market

Section 4: Risk aversion

Please insert a check mark (√) in the appropriate column to indicate whether you agree or
disagree with each of the following statements:
Risk aversion 1 2 3 4 5
Strongly Disagree Not Agree Strongly
Disagree Sure Agree

RA1
I am not willing to take risk when choosing a stock or
investment.
I prefer a low risk/high return investment with a steady
RA2
performance over an investment that offers higher
risk/higher return.
I prefer to remain with an investment strategy that has
RA3
known problems rather than take the risk trying a new
investment strategy that has unknown problems, even if the
new investment strategy has great returns.

32
RA4 I view risk in investment as a situation to be avoided at all
cost.

Section 5
Please provide the following information about yourself.

Gender 1 2
Male Female

Age 1 2 3 4 5
18-25 26-33 34-41 42-49 50 and Above

Qualification 1 2 3 4 5
Matric Bachelor Master MS/ M. Phil PhD

Experience 1 2 3 4 5
5 and Less 6-13 14-21 22-29 30 and Above

Income Level 1 2 3 4 5
Less than 40,000 40,000-70,000 70,000-100,0000 100,000-130,000 130,000 and Above

Thank you for being a part of this study

33