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Does financial literacy reduce Financial

fragility during
financial fragility during COVID-19

COVID-19? The moderation

effect of psychological, economic
and social factors Received 1 November 2020
Revised 8 March 2021
27 April 2021
Malvika Chhatwani Accepted 27 April 2021
OP Jindal Global University, Sonipat, India, and
Sushanta Kumar Mishra
Indian Institute of Management Indore, Indore, India

Abstract
Purpose – The present study examines the linkage between financial literacy and financial fragility during
COVID-19. It further examines if financial literacy has a differential impact on financial fragility based on
psychological (financial confidence), economic (wealth) and social (race) factors.
Design/methodology/approach – The authors used nationally representative data of the American
working age-group. They collated six different datasets collected at different time-periods to conduct the
present study. Based on 2,202 observations, they conducted logistic regression analyses to test the proposed
relationships.
Findings – The authors find that financial literacy reduces the odds of being financially fragile by 9.1%.
Furthermore, they find that financially literate consumers having high financial confidence are less financially
fragile during COVID-19. Besides, the adverse impact of financial literacy on financial fragility is more for
consumers having more than less wealth. The interaction with race is not significant, suggesting that financial
literacy cuts across racial boundaries.
Practical implications – Financial fragility is an important factor having numerous deleterious
consequences. The authors’ study found that financial confidence, psychological factor and wealth
economic factor enhances the negative effect of financial literacy on financial fragility. Banks and financial
institutes can develop mechanisms to infuse confidence in individuals during the pandemic to reduce their
financial fragility. Policymakers and governments may increase awareness related to debt management
practices and design financial literacy interventions to reduce financial fragility among individuals.
Originality/value – The study is one of the initial studies to examine the antecedents of financial fragility.
Based on a time-lagged data, the authors’ study examines the linkage between financial literacy and financial
fragility. Though scholars have investigated financial literacy and its implications, scholarly work in this
domain during COVID-19 is at best limited. The study contributes to the literature by testing the effects of
boundary conditions that can change financial literacy’s impact on financial fragility.
Keywords Financial literacy, Financial fragility, Financial confidence, Wealth, Race, COVID-19
Paper type Research paper

1. Introduction
The economic crisis following the COVID-19 pandemic caused the global financial markets to
lose about $20 trillion in March 2020, and the USA economy was one of the worst-hit countries
(Slok, 2020). S&P 500 was below 30% from its peak in March 2020 (Fernandes, 2020). The
economic fallout due to the pandemic has been dramatic in both speed and scale. To illustrate,

The study draws on data from the surveys administered by the Understanding America Study (UAS),
International Journal of Bank
which is maintained by the Center for Economic and Social Research (CESR) at the University of Marketing
Southern California. The content of this paper is solely the responsibility of the authors and does not © Emerald Publishing Limited
0265-2323
necessarily represent the official view of USC or UAS. DOI 10.1108/IJBM-11-2020-0536
IJBM in February 2020, the unemployment rate in the USA was 3.5%, the lowest in the last
six decades. In April 2020, the unemployment rate was at 14.7%, which was the highest in the
last 90 years (Altig et al., 2020). As measured by newspaper articles, Economic Policy
Uncertainty was at 100 points in January 2020, which grew ten times, reaching 1,000 points
by April 2020. The reason behind uncertainty was attributed to coronavirus (Altig et al.,
2020). All aspects of the lives of people around the world are impacted due to the pandemic.
Salary cuts and layoffs are prevalent, and people have started withdrawing money from their
retirement savings (Mitchell, 2020). In the USA, in January and February 2020, the number of
people claiming the unemployment allowance ranged between 200,000 and 280,000. From
March to May 2020, these numbers increased to around 40 million (Altig et al., 2020). This
extraordinary economic downturn caused by COVID-19 is expected to last for several years
and decades (Jorda et al., 2020). Amidst this economic fallout, people have become financially
vulnerable. In fact, scholars argue that due to COVID-19, there is a substantial reduction in
consumers’ financial risk tolerance (Heo et al., 2021). Therefore, it is critical for banks and
financial institutions to identify factors that can help consumers cope with financial shocks
faced during the pandemic to restore financial stability.
A 2015 survey of USA households showed that 60% of the respondents had faced some
financial shock, and 50% of respondents had difficulty managing the shock that caused
unexpected expenses (Hasler et al., 2018). Further, the findings indicated that the poor and
young individuals had long-lasting effects of such income loss (Pew Research, 2015). One’s
lack of preparedness to meet an unexpected expense of considerable magnitude in the near
future is termed as financial fragility (Lusardi et al., 2011). There are many structural factors
responsible for high financial fragility, and the most prominent one is the lack of savings
among the working people (OECD, 2014). Savings for post-retirement requirements are
generally inadequate (Gomes et al., 2018), and about half of the American population reported
having insufficient funds in their pension savings (Munnell et al., 2019). Though financial
fragility was present before the pandemic, the economic downturn caused by the COVID-19
aggravated the situation. Therefore, understanding the factors that can reduce financial
fragility may help the policymakers restore financial stability during the pandemic.
An individual’s ability to face a financial shock following an uncertain event like job loss
or preparedness to meet unplanned expenses is a critical measure of financial health (Lusardi
et al., 2011). Financially resilient individuals are well prepared to withstand financial shocks
(Lusardi et al., 2020). It was found that in the year 2009, almost half of the USA population was
financially fragile or unable to meet the unplanned expense of $2,000 in the next 30 days
(Lusardi et al., 2011). Researchers have used the equivalent of $2,000 measure in their local
currency as a proxy of financial fragility, such as in Italy (Brunetti et al., 2016), Europe
(Ampudia et al., 2016; Christelis et al., 2009), Estonia (Room and Merikull, 2017) and Australia
(Worthington, 2004).
Scholars have suggested two possible ways to be prepared to withstand financial shocks.
One, making it mandatory for people to save for their retirement and enroll in saving schemes
to maintain long-term financial stability (Clark et al., 2012). Two, increasing financial literacy
would equip people to deal with financial shocks (Kaiser and Menkhoff, 2017). In the present
study, we focus on financial literacy as one of the measures of reducing financial fragility. We
examine financial fragility during the pandemic for the following three reasons. One, financial
fragility can be very costly, especially during the COVID-19. In case people do not have
sufficient funds to cope with unexpected health-related expenses, there could be an increase
in debt, bankruptcy, leading to deleterious outcomes. Two, since the pandemic puts health at
risk, and many people have lost their health insurance coverage due to job loss (Woolhandler
and Himmelstein, 2020), people’s ability to incur emergency medical expenses have gone
down. Unless prepared to meet such costs, consumers’ health and lives could be at risk.
Finally, COVID-19 has not only provided health-related risks but also caused a substantial
financial risk. We argue that financial literacy can minimize the deleterious effects of financial Financial
shock arising due to COVID-19. fragility during
Financial literacy may yield differential outcomes based on many factors. In the present
manuscript, we identified three factors spanning over three critical resources that consumers
COVID-19
possess: psychological (financial confidence), economic (wealth) and social (race). The
resource can be acquired (achieved by one’s effort) by the consumer or ascribed to her/him by
birth (Foladare, 1969). In the present study, we considered each of these factors, i.e., financial
confidence is an acquired factor, and the consumer’s race is an ascribed factor. Wealth
represents both ascribed and acquired resources as consumers accumulate wealth because of
their inheritance (ascribed) and their efforts (acquired). Hence, to summarize, we intend to find
the impact of financial literacy on financial fragility and address three questions. One, does
the linkage between financial literacy and financial fragility vary among consumers with
different financial confidence levels? Two, does the relationship between financial literacy
and financial fragility differ for consumers belonging to different wealth groups? Three, does
the association between financial literacy and financial fragility vary depending on the
consumers’ race group? The answers to the above questions are important for implementing
policies in a targeted manner for effective financial literacy interventions in reducing
financial fragility.
In the present study, we examine representative USA population data. We have used the
data of 1952 American households falling under the category of working age-group. We have
selected the respondents in the working age-group (20–66 years as the official retirement age
in the USA is 66.5 or 67 years) because consumers in this age-group are most productive and
contribute towards the human capital. Our study contributes to the literature in four
important ways. One, though studies have identified the consequences of financial literacy,
scholarly work on these linkages in an uncertain situation is relatively scarce. We conducted
the study at a time when the COVID-19 pandemic was at its peak. Using the logistic
regression model, we found a negative relationship between financial literacy and financial
fragility. Two, we find that financial confidence is important as financially literate consumers
having high financial confidence have significantly lower financial fragility. Three, we
provide empirical evidence that financial literacy is more effective in reducing the financial
fragility of people having more wealth. Our findings thus, provide insights on a targeted
approach to make the intervention (to enhance financial literacy) effective. Four, we found
that race does not moderate the proposed linkage. The findings indicate that financial literacy
could cut across racial boundaries and protect people from financial fragility during the
COVID-19 pandemic.
Our study extends the recent literature on financial literacy by highlighting what banks
and policymakers can do to minimize financial fragility, thus preventing its adverse
consequences such as debt, poverty, and bankruptcy. Policymakers and governments may
increase awareness related to debt management practices and design possible interventions
to reduce financial fragility among individuals.

2. Theory and hypotheses

2.1 Financial literacy and financial fragility
Financial literacy is one’s ability to understand basic financial concepts and make prudent
financial decisions (OECD, 2011). Financial literacy is an important skill to make informed
financial choices that are beneficial to the consumer. The existing literature on financial
literacy has examined the role of financial literacy in positive financial outcomes. Some of
these outcomes are an increase in savings and planning for retirement (Lusardi and Mitchell,
2014), lower levels of debt (Lusardi et al., 2011), and higher lifetime savings (Behrman et al.,
2012). Scholars further found that financial literacy induces a future time perspective, helping
IJBM consumers sustain long-term savings and investments (Kitamura and Nakashima, 2021;
Sivaramakrishnan et al., 2017). Besides, financially literate consumers are less likely to get
influenced by peers, which may help them safeguard against herding behavior and related
investment mistakes (Balloch et al., 2014; Huhmann, 2017). Moreover, financially literate
consumers understand more about savings, investment, the cost of debt and are likely to plan
for future financial needs (Van Rooij et al., 2012). Thus, the literature suggests that financially
literate consumers have higher chances to save, participate in financial markets and continue
retirement saving plans (Clark et al., 2012; Ponchio et al., 2019; Xiao and Porto, 2017).
The existing literature on behavioral finance suggests that consumers are prone to
heuristics and biases, causing sub-optimal financial decisions (Barber and Odean, 2000, 2013;
Chen et al., 2007; De Bondt et al., 2008). Behavioral biases (e.g., mental accounting, herding,
overconfidence, representativeness, emotional tendencies, self-attribution and disposition)
are some of the commonly observed financial mistakes that have a long-term impact on
savings and retirement planning (Benartzi and Thaler, 2007). Financial literacy reduces the
chance of committing financial mistakes, hence minimize the adverse impact of behavioral
biases (Baker et al., 2020) and related anxiety and emotional stress (Vitt et al., 2000).
Based on the above discussion, we posit that consumers with high financial literacy are
more likely to save for future financial needs and are less impacted by behavioral biases and
investment mistakes. Hence, in case of a financial shock caused due to COVID-19, financially
literate consumers would be well prepared to meet unexpected financial expenses. We,
therefore, argue that financially literate consumers are likely to experience less financial
fragility.
H1. Financial literacy is negatively related to financial fragility.
Researchers have examined various reasons underlying financial fragilities, such as the
usage of financial services (Melzer, 2011), institutional factors (Jappelli et al., 2013),
indebtedness (Christelis et al., 2009), and income and spending volatility (Morduch and
Schneider, 2017). Sociodemographic factors such as race, employment status, age, education,
income and gender are associated with financial fragility (Hasler et al., 2018). However, some
of these factors may interact with other factors and provide novel insights. Surprisingly,
studies have largely ignored the combined effect of critical factors on financial fragility.
Therefore, we argue that financial literacy (a form of human capital) combined with other
factors would yield synergistic outcomes. We identify three such factors categorized into
psychological, economic, and social domains. These factors are financial confidence
(acquired), wealth (ascribed or acquired) and race (ascribed) that may interact with
financial literacy and have a differential impact on financial fragility. Ascribed factors are
given by birth, whereas acquired factors are achieved during one’s lifetime by effort
(Foladare, 1969).

2.2 Financial confidence

Financial literacy has two aspects: objective and subjective. Subjective financial literacy, also
known as financial confidence, increases dependence on what consumers already know (Alba
and Hutchinson, 2000; Nejad and Javid, 2018; Riitsalu and Murakas, 2019). The existing
literature has differentiated between objective and subjective financial literacy, and these are
two unique constructs (Friestad and Wright, 1994; Moreau et al., 2001; Park et al., 1994;
Radecki and Jaccard, 1995). Prior research suggests that financial literacy and financial
confidence both independently impact financial behavior (Alba and Hutchinson, 2000).
Financially literate consumers are able to process the available information efficiently to
make financial decisions (Chang, 2004; Wang, 2009). Financial confidence indicates how
much one believes in her/his ability to make financial decisions or how much confidence he/
she has in her/his financial knowledge (Alba and Hutchinson, 2000; Riitsalu and Murakas, Financial
2019). Financial confidence acts as an internal confirmation for the self-accessed financial fragility during
information; for instance, financial confidence determines one’s risk-taking behavior (Nicolosi
et al., 2009; Wang, 2009). Financial literacy relies on information processing based on data and
COVID-19
helps in making financial decisions, whereas financial confidence helps to rely on information
processing based on self-accessed financial literacy and influences the acceptance of financial
decisions (Wang, 2009). Therefore, we argue that financial confidence would enhance
financial literacy’s negative impact on financial fragility because high financial confidence
among financially literate people would enable the acceptability of their financial decisions.
H2. Financial confidence moderates the negative relationship between financial literacy
and financial fragility such that financially literate people having high financial
confidence are less financially fragile.

2.3 Wealth
Wealth is a combination of savings from the current income and a component of assets
obtained through intergenerational transfers (Modigliani, 1985). Wealth can be acquired by
one’s effort during a lifetime or ascribed because of the inheritance of financial resources.
Scholars argue that wealth acts as a coping mechanism to make ends meet after losing a job,
thus, helps to survive the income shocks (Hanspal et al., 2020). An increase in unemployment
due to the pandemic caused income shocks to millions of Americans. In addition to income
shocks, people holding wealth in financial assets were also affected due to the stock market
crash in March 2020 (Baker et al., 2020).
Scholars argue that wealthy consumers are more likely to survive the income shocks
caused during the COVID-19 pandemic (Hanspal et al., 2020). Therefore, wealth may prove
to be a complementary resource to financial literacy because financially literate people
would be more likely to use their wealth wisely (Van Rooij et al., 2012). For example,
financially literate consumers know which assets or stocks to liquidate to meet their
current financial requirements instead of which assets or stocks should be held to gain
maximum benefits. On the other hand, consumers who have financial literacy but lack
financial resources (wealth) may find it difficult to meet unplanned expenses after a job
loss. Hence, we argue that financially literate consumers having wealth would be less
financially fragile.
H3. Wealth moderates the negative relationship between financial literacy and financial
fragility such that financially literate people having more wealth are less financially
fragile.

2.4 Race
The COVID-19 pandemic hit some racial groups more than others, such that blacks and
whites were affected disproportionately, and blacks faced higher health and economic risks
(Holtgrave et al., 2020; Rodriguez-Diaz et al., 2020). For instance, 20% of regions occupied
majorly by blacks accounted for 52% of the COVID-19 positive cases and 58% of total
national deaths during April 2020 (Millett et al., 2020). Unemployment rates between blacks
and whites continued to rise disproportionately, such that the rates of unemployment for
blacks always remained twice higher than white unemployment (Fairlie et al., 2020). Further,
high-skilled occupations that were least affected and had the lowest layoffs were mostly
occupied by whites (44.9% whites vs. 22.1% blacks), resulting in blacks being more
financially affected due to the pandemic (Fairlie et al., 2020).
Because of this disproportionate impact on blacks’ economic lives, the cost of financial
mistakes would be much higher for the blacks, and the ability and skills to understand
IJBM financial matters would act as a shield. Financially literate consumers face lesser information
asymmetry, have fewer chances of being overly indebted, and have the ability to withstand
income fluctuations (Lusardi and Mitchell, 2014). Therefore, the cost of being financially
illiterate would be higher for blacks as compared to whites. Financial literacy helps people
take actions in line with prudent financial behavior, thus, safeguard themselves during
financial shocks. Blacks with high financial literacy would avoid costly financial mistakes
and minimize risks faced due to both racial discrimination and individual limitations.
Therefore, we argue that race would moderate the proposed linkage. The negative linkage
between financial literacy and financial fragility would be stronger for blacks as their
marginal utility of financial literacy would be higher than whites.
H4. Race moderates the negative relationship between financial literacy and financial
fragility such that financially literate blacks are less financially fragile than
financially literate whites.

3. Data and variables

3.1 Sample selection
To assess the relationship between financial literacy and financial fragility, we used the
Understanding America Study (UAS) data collected by the Center for Economic and Social
Research at the University of Southern California. We have received prior permission to use
this dataset. The UAS observes data collection from American households at regular
intervals. The household sample collected is representative of the American population. The
UAS is a collection of three hundred surveys covering various household aspects, including
sociodemographic, financial literacy and financial fragility. It is possible to link several
surveys using a unique identification code.
The UAS has conducted special modules on COVID-19, starting from March 10, 2020. The
unique feature of the UAS data is that we can combine different datasets using the unique
identification code. The data relating to financial fragility that we use in the present study
were collected during July 2020. Thus, we are able to examine the level of financial fragility
during the period when the spread of COVID-19 cases was at its peak (about 4.7 million cases)
in the USA [1]. Most Americans were passing through the situation of extreme vulnerability,
with 16.3 million unemployed individuals marking the unemployment rate at 10.2% [2].
We have combined different datasets collected at six different time periods in the present
study. The timeline of our data is presented in Figure 1. After combining all the datasets, the
sample size without any missing values was 1952 observations. The sample is weighted and

Note(s): The UAS data were collected in multiple waves. The numbers e.g., UAS-18 represent the wave in
which the data collection was initiated. For example, the data in UAS-250 was relatively more recent
Figure 1.
compared to UAS-237
Timeline for data
collection The dates represent the time in which the data collection was completed in a particular wave. The details
about the UAS data can be found at: https://uasdata.usc.edu/index.php
representative of the USA population. The details on the sample weights methodology can be Financial
found at Angrisani et al. (2019). fragility during
COVID-19
3.2 Measuring financial fragility
Financial fragility has been measured in multiple ways in the existing literate (Christelis et al.,
2009; Hasler et al., 2018; Lusardi et al., 2011; Yusof, 2019). In the present study, we follow the
approach suggested by Lusardi et al. (2011), as it is the most commonly used measure. We
used the financial fragility variable captured in the UAS-250 wave, which was conducted
during July 2020. The exact wording of the question as adopted from Lusardi et al. (2011) is as
follows: “How confident are you that you could come up with $2000 if an unexpected need
arose within the next month?” The options given were (1) “I am certain I could come up with
the full $2000” (2) “I could probably come up with $2000” (3) “I could probably not come up
with $2000” (4) “I am certain I could not come up with $2000”. Consistent with past research
(Hasler et al., 2018; Lusardi et al., 2011), we classified these four options to create a financial
fragility dummy variable. The last two options were coded as 1 (financially fragile), whereas
the first two options were coded as 0 (financially non-fragile). Two other options given were
“do not know” and “unsure.” We removed observations with these two responses to minimize
the biases in the analysis.

3.3 Measuring financial literacy

Financial literacy was measured using a 14-item questionnaire adapted from the American
Life Panel (ALP). The scale provides a more robust proxy for understanding the relationship
between financial literacy and financial fragility during COVID-19. The financial literacy
scores were captured in survey wave no. UAS-237. Thus, our independent variable (financial
literacy) was captured before the dependent variable (financial fragility), which mitigates any
probability of common method variance (Podsakoff et al., 2003).

3.4 Moderators and control variables

The three moderators proposed in the study are financial confidence, wealth and race.
Financial confidence is considered as one’s confidence in the ability to make financial
decisions (Babiarz and Robb, 2014; Riitsalu and Murasaku, 2019; Tokar Assad, 2015).
Respondents were asked to rate their financial understanding on a ten-point scale where ten is
the highest financial confidence. This measure is used in the existing literature as a valid
proxy of financial confidence (Babiarz and Robb, 2014; Sansone et al., 2019; Tokar Assad,
2015; Xia et al., 2014). We measured wealth using the natural logarithm of the respondents’
total wealth, and wealth (log) is taken as a continuous variable in the analysis. For the race, we
coded blacks as 1 and whites as 0. We removed all the other minority racial groups from the
analysis.
Building on the existing literature, we control for sociodemographic factors that are
expected to have some impact on our outcome variable. These control variables include age,
gender, education, marital status, income, employment status and country of birth (Chatterjee
et al., 2019; Hasler et al., 2018; Lusardi et al., 2011; Ponchio et al., 2019; Xiao and Porto, 2017).
The details of the measurement of these variables appear in Table 1.

3.5 Model estimation

We used the logistic regression model to test the association between financial literacy and
financial fragility. A logistic model can incorporate quantitative and qualitative factors,
making it a better fit to estimate the linear regression probability model. The logistic
regression model is as follows.
IJBM Survey
Variable Description wave

Financial fragility The detailed question was: How confident are you that you could UAS-250
come up with $2,000 if an unexpected need arose within the next
month?
Financial literacy Sum of the number of correct answers to the financial literacy scale. UAS-237
This measure was adopted from the American Life Panel and
Lusardi and Mitchell (2017)
Financial confidence Respondent’s answer to confidence in making financial decisions on UAS-119
a scale of 1–10 (10 5 highest confidence)
Wealth Continuous variable stating the log of amount of wealth of the UAS-24
respondent
Race Dummy 5 1 if the respondent is black, and zero otherwise General
Age (years) Ordinal variable reporting the respondent’s age in numbers General
Gender Dummy 5 1 if the respondent is male, and zero otherwise General
Income: less than $30,000 Dummy 5 1 if the respondent has an annual income less than General
$30,000, and zero otherwise
Income: $30,000 to Dummy 5 1 if the respondent has an annual income between General
$49,999 $30,000 to $49,999, and zero otherwise
Income: $50,000 to Dummy 5 1 if the respondent has an annual income between General
$99,999 $50,000 to $99,999, and zero otherwise
Income: above $1,00,000 Dummy 5 1 if the respondent has an annual income above General
$1,00,000, and zero otherwise
Marital status Dummy 5 1 if the respondent is married, and zero otherwise General
Education: less than high Dummy 5 1 if the respondent has education less than high school, General
school and zero otherwise
Education: high school Dummy 5 1 if the respondent has education up to high school, and General
zero otherwise
Education: some degree Dummy 5 1 if the respondent has education up to some degree no General
no college college, and zero otherwise
Education: college Dummy 5 1 if the respondent has a college degree, and zero General
otherwise
Employment status Dummy 5 1 if the respondent is working currently, and zero General
otherwise
Country of birth Dummy 5 1 if the respondent was born in the USA, and zero UAS-117
otherwise
Checking account Dummy 5 1 if the respondent has a checking account, and zero UAS-18
Table 1. otherwise
Variables description Note(s): Table 1 reports variables description and their source from respective survey waves

0
PðDFFG ¼ 1Þ ¼ Fðβ X Þ þ C

DFFG is a dummy variable that takes the value of 1 if a respondent is financially fragile and 0 if
the respondent is financially non-fragile. F(.) is the cumulative density function of the logistic
distribution, β is a vector of coefficients, and X is a vector of explanatory variables denoting
financial literacy and other sociodemographic variables and C is the constant term. We
estimate the logistic regression model using the maximum likelihood estimate. Robust
standard errors are reported in the analysis to reduce any biases in the analysis.

4. Empirical analysis
4.1 Univariate analysis
Table 2 provides a detailed univariate analysis of the respondents’ characteristics for financially
non-fragile and financially fragile consumers. The average financial literacy score for financially
 Full sample Financially non-fragile Financially fragile
Observations Mean SD Min Max Obs1 Mean 1 Obs 2 Mean 2 Diff t-value

Financial fragility 1,952 0.166 0.373 0 1

Financial literacy 1,952 9.859 3.131 0 14 1,627 10.302 325 7.640 2.662 14.750***
Financial confidence 1,952 8.154 1.715 0 10 1,627 8.302 325 7.413 0.890 8.700***
Wealth (log) 1,952 10.565 2.064 0.693 17.328 1,627 10.926 325 8.758 2.168 18.800***
Race 1,952 0.068 0.252 0 1 1,627 0.056 325 0.129 0.073 4.800***
Age 1,952 49.944 11.127 20 66 1,627 50.136 325 48.984 1.151 1.700*
Gender 1,952 0.412 0.492 0 1 1,627 0.437 325 0.289 0.147 4.950***
Education: less than high school 1,952 0.034 0.182 0 1 1,627 0.026 325 0.077 0.051 4.650***
Education: high school 1,952 0.166 0.373 0 1 1,627 0.144 325 0.277 0.133 5.900***
Education: some degree no college 1,952 0.194 0.395 0 1 1,627 0.185 325 0.237 0.052 2.1500**
Education: college 1,952 0.606 0.489 0 1 1,627 0.644 325 0.409 0.235 8.050***
Income: less than $30,000 1,952 0.157 0.364 0 1 1,627 0.088 325 0.508 0.420 20.950***
Income: $30,000 to $49,999 1,952 0.150 0.357 0 1 1,627 0.13 325 0.253 0.123 5.700***
Income: $50,000 to $99,999 1,952 0.367 0.482 0 1 1,627 0.403 325 0.188 0.216 7.450***
Income: above $1,00,000 1,952 0.325 0.468 0 1 1,627 0.379 325 0.052 0.327 11.900***
Employment status 1,952 0.700 0.458 0 1 1,627 0.732 325 0.538 0.194 7.050***
Country of birth 1,952 0.952 0.214 0 1 1,627 0.955 325 0.936 0.020 1.500
Marital status 1,952 0.653 0.476 0 1 1,627 0.695 325 0.443 0.252 8.850***
Checking account 1,952 0.968 0.175 0 1 1,627 0.985 325 0.883 0.102 9.800***
Note(s): Table 2 reports the univariate analysis of financial literacy, sociodemographic variables, and moderators between financially fragile and non-fragile groups.
***p < 0.01, **p < 0.05, *p < 0.1
COVID-19
fragility during

Table 2.
Financial

Descriptive statistics
IJBM non-fragile consumers is 10.302, whereas it is 7.640 for financially fragile respondents. Based on
the univariate analysis, it is evident that financially fragile consumers have significantly lower
financial literacy. The average age of financially fragile (non-fragile) respondents is 48.984 years
(50.136 years). About 28.9% (43.7%) were male, and only 44.3% (69.5%) were married.
Based on the average scores between the two groups, we observe that the mean values are
high for blacks in financially fragile groups. Further, respondents also significantly differ
based on their wealth, income, education and employment status. Based on this univariate
analysis, we observe that financially fragile and non-fragile groups differ on many
parameters. Hence, it would be interesting whether financial literacy can reduce financial
fragility even after controlling for all the sociodemographic and economic differences.

4.2 Regression results

We estimated a logistic regression model featuring financial fragility among the American
working age-group during COVID-19 as a dependent variable (see Table 3). The model
provides significant results for the overall fit-test (p-value < 0.001). Besides, we checked the
VIF values. The VIF values ranged from 1.01 to 1.58, below the accepted threshold (O’brien,
2007). Hence multi-collinearity is a non-issue in the present study. Robust standard errors are
reported, and model specification error is non-existent in our results. Overall, the estimated
model has a good fit; thus, it is suitable to use the estimated model for the interpretations.
In Table 3, we report the logistic regression results for the USA working age-group
featuring financial fragility as the dependent variable. The sample is weighted and
representative of the USA population. From Panel A to E, we report logistic regression
coefficients and odds ratios. Panel A reports the effect of financial literacy without any
control variables. In Panel B, we add all the control variables. In Panel A and B, the
coefficients for financial literacy are negative and significant. The odds ratio for financial
literacy in Panel B is 0.901, which suggests that high financial literacy reduces the odds of
financial fragility by 9.9%. Among control variables in Panel B, financial confidence, income,
born in the USA, and checking account are negative and significant. After all the control
variables, the results in Panel B indicate that financial literacy has a negative association with
financial fragility. Hence, Hypothesis 1 is supported.
Next, we examine the interaction effects of financial literacy on financial fragility with
financial confidence (Panel C), wealth (Panel D) and race (Panel E). In Panel C, we observe that
the interaction term is highly significant for the interaction analysis reported between
financial literacy and financial confidence. Financially literate consumers having high
financial confidence have 2.4% lower odds of being financially fragile. This finding suggests
that financial literacy and financial confidence together help to reduce financial fragility.
Thus, we find support for Hypothesis 2. The graphical presentation of this interaction is
given in Figure 2.
Panel D reports the results of the interaction effect of wealth and financial literacy on
financial fragility. The interaction term’s coefficient is significant and negative, suggesting
that financially literate consumers having high wealth are less likely to be financially fragile.
The odds ratio is 0.975, and it is significant. Our Hypothesis 3 gets supported. We report the
interaction plot in Figure 3. The significant interaction term draws attention towards the
differential impact of financial literacy across wealthy groups. The finding suggests that
wealthy people are more likely to reduce financial fragility with high financial literacy (see
Figure 3).
In Panel E, we observe that the interaction between financial literacy and race is not
significant in explaining financial fragility. Hypothesis 4 is not supported. However, this
finding provides an interesting perspective that financial literacy is not differentially
protective between the race groups. Therefore, increasing financial literacy would reduce
financial fragility, irrespective of racial identity. The possible explanation for this finding is
 Panel A Panel B Panel C Panel D Panel E
Variables Coefficient Odds ratio Coefficient Odds ratio Coefficient Odds ratio Coefficient Odds ratio Coefficient Odds ratio

Financial literacy score 0.264*** (0.020) 0.768*** (0.016) 0.104*** (0.028) 0.901*** (0.025) 0.084 (0.099) 1.088 (0.108) 0.135 (0.117) 1.144 (0.134) 0.112*** (0.029) 0.894*** (0.026)
Financial confidence 0.194*** (0.039) 0.824*** (0.032) 0.000 (0.105) 1.000 (0.105) 0.191*** (0.039) 0.826*** (0.032) 0.192*** (0.039) 0.826*** (0.032)
Wealth (log) 0.293*** (0.041) 0.746*** (0.031) 0.291*** (0.041) 0.748*** (0.031) 0.081 (0.108) 0.922 (0.099) 0.290*** (0.041) 0.748*** (0.031)
Race 0.126 (0.245) 0.882 (0.216) 0.161 (0.246) 0.851 (0.209) 0.126 (0.242) 0.881 (0.214) 0.845 (0.674) 0.430 (0.289)
Age 0.003 (0.007) 0.997 (0.007) 0.003 (0.007) 0.997 (0.007) 0.003 (0.007) 0.997 (0.007) 0.004 (0.007) 0.996 (0.007)
Gender – male 0.200 (0.168) 0.819 (0.138) 0.209 (0.169) 0.811 (0.137) 0.202 (0.168) 0.817 (0.138) 0.197 (0.168) 0.821 (0.138)
High school 0.260 (0.348) 1.297 (0.451) 0.319 (0.350) 1.375 (0.481) 0.192 (0.344) 1.212 (0.417) 0.282 (0.350) 1.326 (0.464)
Some degree no college 0.053 (0.354) 1.054 (0.374) 0.094 (0.356) 1.098 (0.391) 0.019 (0.349) 1.020 (0.356) 0.069 (0.356) 1.071 (0.381)
College graduate 0.169 (0.351) 1.184 (0.416) 0.232 (0.354) 1.261 (0.446) 0.127 (0.346) 1.136 (0.393) 0.185 (0.352) 1.203 (0.424)
$30,000 to $49,999 0.820*** (0.198) 0.440*** (0.087) 0.826*** (0.199) 0.438*** (0.087) 0.846*** (0.198) 0.429*** (0.085) 0.831*** (0.198) 0.436*** (0.086)
$50,000 to $99,999 1.909*** (0.219) 0.148*** (0.032) 1.909*** (0.220) 0.148*** (0.033) 1.932*** (0.219) 0.145*** (0.032) 1.930*** (0.220) 0.145*** (0.032)
$100,000 or more 2.720*** (0.318) 0.066*** (0.021) 2.707*** (0.319) 0.067*** (0.021) 2.715*** (0.318) 0.066*** (0.021) 2.734*** (0.318) 0.065*** (0.021)
Currently working 0.006 (0.171) 1.006 (0.172) 0.009 (0.172) 1.010 (0.173) 0.019 (0.171) 1.019 (0.175) 0.020 (0.172) 1.020 (0.175)
Born in the US 0.678** (0.325) 0.508** (0.165) 0.667** (0.326) 0.513** (0.168) 0.668** (0.327) 0.513** (0.168) 0.663** (0.326) 0.515** (0.168)
Married 0.002 (0.163) 1.002 (0.164) 0.015 (0.164) 0.985 (0.161) 0.000 (0.163) 1.000 (0.163) 0.012 (0.164) 1.012 (0.166)
Checking account 0.624** (0.311) 0.536** (0.167) 0.624** (0.311) 0.536** (0.166) 0.616** (0.309) 0.540** (0.167) 0.622** (0.311) 0.537** (0.167)
Financial 0.024** (0.012) 0.976** (0.012)
literacy*Financial
confidence
Financial 0.025** (0.012) 0.975** (0.012)
literacy*Wealth (log)
Financial literacy*Race 0.103 (0.089) 1.108 (0.098)
Constant 0.772*** (0.180) 2.165*** (0.390) 6.389*** (0.729) 595.151*** 4.811*** (1.067) 122.820*** 4.367*** (1.185) 78.774*** 6.393*** (0.729) 597.521***
(433.588) (131.010) (93.377) (435.774)
Observations 1,952 1,952 1,952 1,952 1,952 1,952 1,952 1,952 1,952 1,952
Note(s): Table 3 reports the results for logistic regression featuring financial fragility as the dependent variable. Coefficients and odds ratios are given for the reported
results and standard errors are given in parentheses. Panel A reports results without control variables, and control variables are included in Panel B. The interaction terms
are given in panels C to E. ***p < 0.01, **p < 0.05
COVID-19
fragility during
Financial

Regression table
Table 3.
IJBM

Figure 2.
Interaction effect of
financial literacy and
financial confidence on
financial fragility

Figure 3.
Interaction effect of
financial literacy and
wealth (log) on
financial fragility

as follows. Financial literacy is a form of human capital (Lusardi and Mitchell, 2014),
therefore, irrespective of race, consumers may benefit from financial literacy, and it is not
differentially protected by race. Thus, regardless of racial differences, increasing financial
literacy would reduce the financial fragility during the pandemic.

5. Discussion
The literature suggests that financial literacy is a critical tool to enhance financial well-being
(Lusardi and Mitchell, 2014). For example, scholars found that it increases savings for
retirement (Lusardi and Mitchell, 2014), wealth accumulation (Van Rooij et al., 2012), financial
satisfaction (Xiao and Porto, 2017), reduces the experience of being overly indebted (Lusardi
and Tufano, 2009), and lowers the cost of borrowing (Huston, 2012). However, a deeper
inquiry into the boundary conditions of the impact of financial literacy on financial fragility
is, at best, under-addressed. Examining financial fragility is critical as it leads to many
adverse consequences such as an increase in debt, poverty, and subsequent bankruptcy
(Morrison et al., 2013). We find a negative association between financial literacy and financial
fragility during the pandemic such that financially literate individuals were less likely to Financial
report finding it difficult to come up with $2,000 of an emergency expense. The results are fragility during
based on data collected during different periods, which helps avoid the possibility of
endogeneity. The association between financial literacy on financial fragility is significantly
COVID-19
moderated by financial confidence and wealth. We found that the relationship between
financial literacy and financial fragility does not depend on the consumer’s race. This finding
reinstates the focus on financial literacy’s strength, suggesting that it can cut across racial
differences.
We also checked the possible combinations of three-way interactions (unreported results)
using different combinations of moderators used in the present analysis and financial literacy
in unreported results. Financial confidence and wealth together continue to enhance the
benefits of financial literacy. The effect of race remains non-significant when combined with
wealth or financial confidence. Further, we also checked these interactions without control
variables and without using sample weights. Overall, the main findings reported in the study
remain consistent and robust.
5.1 Contributions
We contribute to the existing literature in four important ways. One, we contribute to the
literature on positive outcomes of financial literacy and show that increasing financial
literacy is likely to reduce financial fragility among individuals in uncertain times such as the
pandemic. Two, we contribute to the emerging literature on financial fragility by exploring
the boundary conditions for the impact of financial literacy on financial fragility. We provide
evidence that financial confidence strengthens the effect of financial literacy, such that
individuals having high financial literacy and financial confidence are less likely to be
financially fragile. Three, by showing a positive and significant interaction effect between
wealth and financial literacy, we show there is an additional benefit of the combined effect of
financial literacy and wealth. This significant interaction term also indicates that wealthy and
financially literate people may have managed their wealth appropriately to meet unexpected
expenses. Four, our findings demonstrate that financial literacy cuts across racial
boundaries. As a form of human capital, financial literacy is beneficial irrespective of one’s
race. Once consumers acquire financial literacy, they would withstand financial shocks and
reduce financial fragility regardless of their race.

5.2 Theoretical implications

Our measure of financial fragility has multiple facets. It is measured in terms of one’s ability
to come up with a certain amount ($2,000) in a month. This amount represents a regular size
expense: a car repair, health-related expenses, or any other emergency expense. The
timeframe attached to withstand this amount of expenditure indicates one’s ability to explore
available resources such as selling possessions, accessing social connections, or going from a
short-term credit. These financial fragility features open a diverse outlook that individuals
categorized as financially fragile are under a severe threat of falling into excessive debt,
poverty, or bankruptcy. Hence, financial fragility impacts consumers’ cognition and behavior
(Hamilton et al., 2019). Scholars have suggested more studies to examine financial fragility
during COVID-19 (Trueblood et al., 2020). Our study provides evidence that financial literacy
can be an important factor in minimizing financial fragility during the pandemic.
To manage the financials, individuals should have the capacity to perform financial
calculations to deal with financial markets. As financial knowledge is considered a type of
investment in human capital (Lusardi and Mitchell, 2014), it can prepare individuals to deal
with shocks.
The findings of the boundary conditions of the linkage between financial literacy and
financial fragility have important theoretical implications. In addition to increasing financial
IJBM literacy, we provide evidence for the better impact by focusing on financial confidence and
wealth (acquired factors). Contrary to our hypothesis, we did not find support for the
boundary effect of race (ascribed factor). Our study demonstrates that the commonly
considered social factor such as race is not a differential factor in explaining financial
literacy’s effect on financial fragility. The financial management literature has not adequately
considered psychological factors in explaining individual behavior. Our study highlights the
importance of psychological factors in minimizing financial fragility.
Theoretically, highly financially fragile individuals may be more likely to borrow at a
higher interest rate, and overall, they would be more sensitive to changes in interest rates.
Besides, financial fragility among working-age people, as addressed in the present study,
indicates a lack of financial resources and high debt levels, which could be fatal in the long
term. When these working-age financially fragile people enter their retirement, they will face
a severe lack of retirement wealth. They would have higher chances of retirement
bankruptcy, which is undesirable for society at large. Policymakers may intervene early to
reduce financial fragility among working-age people to minimize such long-term costs related
to retirement insecurity.
5.3 Managerial and policy implications
COVID-19 not only created severe health challenges, but it impacted the financial lives of
many Americans. As an immediate measure, the government passed the CARES Act in
March 2020 (Driessen, 2020) to soften the pandemic’s effect on vulnerable Americans. Our
study proposes a long-term solution to handle financial fragility. Even after vaccines are
developed, financial literacy programs can equip people to deal with future economic shocks,
reducing their financial fragility chances.
The findings of the boundary conditions of the linkage between financial literacy and
financial fragility have important policy implications. In addition to increasing financial
literacy, we provide evidence for the better impact by focusing on financial confidence. Banks
and financial institutions may focus on financial literacy as well as increasing financial
confidence that may yield more benefits in improving the overall situation. Moreover, being
financially fragile could be one of the antecedents of acquiring more debt. Exploring ways to
enhance debt management practices could be one of the objectives of financial managers. The
policymakers and financial institutes may consider increasing awareness of the short-term
and long-term pitfalls of accumulating debt that may help avoid possible serious issues such
as retirement bankruptcy.
In addition to financial literacy, we find that income, born in the US, and having a checking
account is negatively related to financial fragility. Managers and policymakers may focus
more on immigrants and provide necessary interventions to make them financially literate as
they are at more risk. The benefits of having a checking account are highlighted in the present
findings providing one of the possible ways of ensuring people who have checking accounts
are likely to save money and have lower financial fragility. Financial institutions and
policymakers may consider this finding and state reduced financial fragility as one of the
benefits of using a formal financial system and having checking accounts. Another
implication is identifying potential customers for short-term credit and loans. People who
report being financially fragile are more likely to borrow money, and financial institutions
may design special products to cater to this segment’s urgent monetary needs.

5.4 Limitations and future directions

The survey ranged over multiple years, and data were collected in six different waves.
However, our study variables were collected only once, making the data cross-sectional.
Future studies may consider using a longitudinal research design where the independent and
dependent variables can be collected multiple times. Moreover, the financial fragility-related
data were collected during June–July 2020 when COVID-19 cases were increasing. There were Financial
no known remedies to handle the pandemic. Future studies may investigate if the examined fragility during
linkages change with time or after developing a vaccine.
It is possible that people acquire financial literacy with time during or after facing a
COVID-19
financial shock, altering the existing relationship in the long run. Scholars may capture this
phenomenon through longitudinal studies in the future. In univariate analysis, we observe a
pattern based on race and gender such that females and blacks experience high financial
fragility, which warrants further investigation. Future studies may explore whether blacks or
whites differ in their financial fragility experience across gender groups. We have used a
single-item scale of financial fragility. Future studies may consider using a multi-item scale.
Additionally, we find a weak correlation between financial literacy and financial fragility.
Hence, future studies may consider exploring this linkage further using structural equation
modeling (SEM) analysis for a deeper understanding.
The cultural context matters in financial behavior and financial literacy (De Beckker et al.,
2020). Similar studies in different countries and contexts may also provide further insights.
We analyzed the data collected in a developed economy (USA) in the Western cultural
context. The Western-Eastern contexts are classified in terms of individualistic-collectivistic
cultural values (Hofstede, 1980). Also, the demand and scope of financial services differ in
these contexts. Hence, during COVID-19, people in Eastern contexts might be deriving
support from others due to collectivistic values. Future studies may explore whether the
findings be the same in developing economies in the Eastern cultural context.

6. Conclusion
COVID-19 provides a unique context of health and economic crisis. Increased financial
fragility during the pandemic among the working population is a matter of concern. In the
long-term, these individuals bear a higher risk of running out of money during retirement or
taking high-cost debt. Combining six different waves of data of working-age people, we
examined the relationship between financial literacy and financial fragility during the
pandemic. As predicted, we found that consumers having high financial literacy are 9.1% less
likely to be financially fragile. This linkage is more negative among consumers with high
financial confidence or more wealth, but this linkage does not alter depending on one’s race.
Considering that consumers are a homogenous group may not yield the desired outcome, our
findings indicate that focusing on psychological, economic and social factors is essential for
addressing the financial fragility issue. Financial institutions and policymakers may
undertake suitable actions by increasing financial literacy, financial confidence and spread
awareness of prudent debt management practices that may help avoid financial fragility
during the pandemic.

Notes
1. Source: https://www.worldometers.info/coronavirus/country/us/ as accessed on August 28, 2020.
2. Source: https://www.bls.gov/news.release/pdf/empsit.pdf as accessed on August 28, 2020.

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Further reading
Al-Bahrani, A., Weathers, J. and Patel, D. (2019), “Racial differences in the returns to financial literacy
education”, Journal of Consumer Affairs, Vol. 53 No. 2, pp. 572-599.
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behavior”, Journal of Banking and Finance, Vol. 92, pp. 168-181.
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Journal of Economic Psychology, Vol. 51, pp. 114-133.
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role of financial knowledge, satisfaction, and confidence”, Financial Services Review, Vol. 21
No. 4, pp. 291-305.
IJBM About the authors
Malvika Chhatwani is a faculty at O.P. Jindal Global University. She received her Ph.D. from the Indian
Institute of Management Indore. In her research, Malvika studies various aspects related to economic
psychology, behavioral aspects and personality traits of financial decision-making. Her research has
been published in national and international journals of repute. Malvika Chhatwani is the corresponding
author and can be contacted at: mnchhatwani@jgu.edu.in
Sushanta Kumar Mishra is a professor in the OB and HRM area at the Indian Institute of
Management Indore. His scholarly work has been published in Journal of Organizational Behavior,
Journal of World Business, Human Resource Management, Human Resource Management Review,
Human Resource Management Journal and in many other journals of repute. His paper in the
International Journal of HRM received the Michael Poole Highly Commended Award for the year 2019.
He is in the review panel of many reputed journals and in the editorial board of the Academy of
Management Learning and Education.

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