BEHAVIORAL BIASES AND STARTUP FINANCING DECISIONS THE MODERATING EFFECT OF FINANCIAL LITERACY

The process of financing startups can be significantly affected by psychological and behavioral factors which go against the principles and premises of conventional finance theories. This research focuses on the effects of behavioral biases on financing decision made by entrepreneurs. Based on the principles of behavioral finance theory, this research will assess the effects of different cognitive biases such as over confidence, optimism bias, and loss aversion on the financial behavior and decision making of entrepreneurs. This study takes an empirical approach, applying the quantitative research methodology to conduct a cross-sectional survey involving the founders of startups and entrepreneurs. Data collection was conducted using a questionnaire. Structural equation modeling using the Smart PLS technique was used to test the hypothesized relationships in the study. It is noted that behavioral biases have a great effect on the risk taking behavior of entrepreneurs. The results revealed that risk tolerance had a mediating effect on the relationship between behavioral biases and financing behavior, implying that an entrepreneurs tolerance to financial risks is very important in his/her financing behaviors. On the other hand, financial literacy exhibited a strong moderating effect in that it helped reduce irrational financing behaviors and increased rational financial behavior among entrepreneurs. It is hoped that this research will contribute to both behavioral finance and entrepreneurial finance theories because it provides an integrated theory for explaining startup financing behaviors.