Financial literacy of managers and the efficiency of capital allocation in corporations
Economic research suggests that management practices are important drivers of firm-level productivity. A recent IGC study examined management practices in Mozambican manufacturing firms and found that the implementation of good management practices is very low, even when compared to other countries in Sub-Saharan Africa. This indicates that interventions to improve management practices may be a promising avenue for stimulating growth in Mozambique.
A related body of research suggests that financial practices are also important, indicating that managers with financial expertise allocate their firms´ financial resources more efficiently.
For instance, these financial experts hold less cash, more debt, and are more sophisticated using appropriate discount rates when evaluating projects. They are also more effective at communicating with analysts and more successful at getting access to outside financing when facing limited credit supply.
This project will study the financial expertise of the top executives of Mozambique´s largest firms. Subsequently, we will investigate whether a causal link exists between the financial expertise of top executives and the financial policies and performance of the firms.
Understanding the links between financial skills, financial education and firm performance can generate policy-relevant insights. The results will provide guidance on how to develop policies to improve the allocation of financial resources within firms and how to help firms accessing external financing. For instance, they may suggest that providing financial education to executives of SMEs and larger firms could make an important contribution to private sector development.
For this scoping project we will survey the 100 largest firms in Mozambique. The consulting company KPMG carries out an annual survey on 1000 Mozambican firms and provides an annual report on the 100 largest ones. Through face-to-face interviews, our survey aims to collect detailed data on the financial expertise of the top executives as well as on these firms´ financial policies and performance.
This is the first step towards a broader research agenda that aims to test for a causal link between financial expertise of executives and firm financial policies and, ultimately, an efficient capital allocation.
The second step intends to implement a randomized experiment to evaluate the impact of financial education for managers on firms’ outcomes. For this experiment we will randomize managers of the surveyed firms who have expressed interest in participating into treatment and control groups, whereby the treatment groups will be taught an MBA style finance course. This course will be custom-made, specifically designed to address the topics that are most relevant for the economy and private sector in Mozambique. We plan to measure the impact of this financial education in several ways. First, we will conduct survey interviews similar to those conducted for the first stage with participants and control firms. Second, and more importantly, we will measure several financial outcomes directly based on accounting information of the firms. We will also look at potential spillover effects that may affect peer firms in the long-run.