The impact of financial education

Mar. 30, 2021

New evidence shows that financial education makes a difference for firm performance. Assistant professor Diogo Mendes recent experiment in Mozambique gives new insight that can be especially useful for developing countries.

Participation in executive education can lead to significant changes in financial policies and investment decisions. And the good news is that it doesn’t have to be costly nor time-consuming. Relatively low-cost interventions, such as an 18-hour executive education course on corporate finance and risk management, can lead to substantial changes. The experiment showed that the benefit was largest for those companies with CEOs without prior finance experience and firms facing higher financing constraints.

– The results in the paper show new evidence that deficiencies in financial expertise of managers at large firms can be an important constraint on firm performance, particularly in contexts with severe financial frictions. They also support the need for education programs at the corporate level, as formal education of key executives is an effective vehicle to improve financial practices, said Diogo Mendes.

While most research in developing countries has focused on poor, relatively less-educated households and entrepreneurs, the average manager participating in this project is well educated. This fact might be important since previous research has suggested that cognitive constraints are a key barrier to improving financial knowledge. Understanding what type of education is most efficient remains an important avenue for future research – especially whether online courses that can potentially reach a large audience at a very low cost can achieve similar results.

The study was done by Diogo Mendes, Swedish House of Finance at the Stockholm School of Economics, Claudia Custodio, Imperial College London, and Daniel Metzger, Rotterdam School of Management.