DETERMINANTS OF FINANCIAL RISK ATTITUDE AMONG THE SMES

1.0 Introduction

Little research has been caried out in the area of financial risk attitude among SMEs. Although some
researchers have paid attention to risk tolerance (Likudie, 2020; Rahman, et al., 2023) and how risk
attitude affects management decisions (Abotsi, Dake and Agyepong, 2014; Dvorsky, 2021), little is
known about the factors that account for risk attitude among small business owners and managers.
Furthermore, the significance of the role of SMEs in any market economy has been widely established as
they possess a greater degree of adaptability and creativity. This enables them to meet the changing
market demands and cater to the diverse needs of customers faster and easier than bigger firms. Thus,
SMEs in any country (especially emerging economies) are vital contributors to economic and social
stability (Buchdadi etal., 2020; Belás et al., 2015). Although small and medium-sized enterprises (SMEs)
play a critical role in the development of Ghana, their managers encounter various business risks. These
risks, if not effectively managed, can have catastrophic consequences on the hard work and efforts
invested by entrepreneurs for the success of their businesses (Abotsi et al., 2014).

Previous studies have suggested that the risk attitudes of business managers influence their capital
structure choices (Ra, 2016; Tahir et al., 2020). However, these studies have mostly focused on large
listed firms in developed countries, and the findings may not apply to small and medium-sized enterprises
(SMEs) for a number of reasons. For example, large corporations may have more flexibility in accessing
capital due to their institutional and regulatory environment. Secondly, these large organizations are
mostly managed by a group of business executives where control and ownership are not centralized. This
makes it difficult to investigate the factors that affect the risk attitudes of such managers. In contrast,
SMEs are typically owner-managed, with the owner's risk preferences directly reflecting in the financing
activities of the business. As such, personal attributes of SME owners/managers may have a stronger
influence on their financing and risk preferences.

Research in Ghana on the topic of risk attitude has mostly focused on individual psychological factors,
and primarily examining the role of financial literacy in determining the risk attitude of individuals and
business managers.

According to the Ghana Statistical Service (GSS), Small and Medium Enterprises (SMEs) make up about
92% of businesses in Ghana (Amoah and Amoah, 2018). The fact that a significant percentage of
businesses in Ghana are SMEs highlights their importance in the country's economy. As SMEs make up a
large portion of the business landscape, their success or failure can have a significant impact on the
overall economic health of the country. It is very important for SMEs in Ghana to manage risk. SMEs
often operate in environments that are characterized by high levels of uncertainty and risk (Taylor, 2013),
and their success depends on their ability to navigate and manage these risks effectively. Failure to
manage risk can result in financial losses, reputational damage, and even business failure. Additionally,
access to finance is often limited for SMEs in Ghana, so managing risk can help to reduce the cost of
borrowing and increase their ability to access financing in the future. Overall, effective risk management
is critical for the long-term success and sustainability of SMEs in Ghana.

Overall, the research on the determinants of financial risk attitude among SMEs in Ghana is still relatively
limited, but there is a growing interest in the topic. It is therefore necessary to investigate the determinants
of risk attitude of business owners and managers of small and Medium-scale Enterprises (SMEs) –
especially in developing countries like Ghana.

1.1 Purpose of the Study

The purpose of this study is to investigate the determinants of financial risk attitude among small and
medium-sized enterprises (SMEs). Specifically, the study aims to identify the factors that influence
SMEs' attitudes towards financial risk, including individual and organizational characteristics, financial
literacy, perceived risk and return, and external factors such as industry and regulatory environment. By
understanding the determinants of financial risk attitude among SMEs, the study seeks to contribute to the
development of effective risk management strategies that can help SMEs navigate the challenges of
financial decision-making and improve their overall financial performance.

Research Objectives

The main objectives of the study are as follows:

1. To investigate the determinants of risk attitude of SME owners and managers of SMEs in Ghana
2. To examine the relationship between the financial risk attitudes of SME owners/managers and
their financing decisions.
3. To investigate the impact of external factors, such as the institutional and regulatory environment,
on the financial risk attitudes of SME owners/managers.

1.2 Research Questions

The research questions for the study are as follows:

1. What is the owner/manager characteristics that influence financial risk attitude in SMEs?
2. What are the firm-level characteristics that influence financial risk attitude in SMEs?
 3. What are the external factors that influence financial risk attitude in SMEs, such as economic
conditions or regulatory environment?

1.3 Proposed Structure of the Thesis Paper

Chapter One: - Introduction, background of the study, research objectives and research questions, scope
of the study.

Chapter Two: - Literature review, theoretical review, related literature.

Chapter Three: - Research methodology the study will adopt, the type of data that will be collected for
the study, the research instruments/data collection in students, how the data will be analyzed, ethical
considerations

Chapter Four: - Presentation of analyzed data, discussions and conclusions drawn from the data.

Chapter Five: - Summary of the study, conclusion for the study, recommendations.

2.0 Literature Review

2.1 The Theoretical lens for the Study

1. Prospect Theory (Edwards, 1996): This theory suggests that individuals make decisions based
on the potential value of gains and losses, and that they are more sensitive to losses than gains.
Therefore, in the context of SMEs, this theory may help to explain why some SMEs are more
risk-averse than others when it comes to financial decision-making.
2. Social identity theory (Hogg, 2016): Social identity theory suggests that individuals form their
sense of identity based on the groups to which they belong. This theory may be useful in
understanding how the characteristics of an SME and its industry may influence its financial risk
attitude. For example, SMEs in high-risk industries may be more likely to adopt a risk-taking
approach due to the perceived norms and expectations of that industry.
3. Behavioral Finance Theory (Brooks and Byrne, 2008): This theory incorporates psychological
concepts into finance to explain how emotions and biases can affect financial decision-making.
This theory can be applied to the topic by providing insights into how individual cognitive biases
and emotions influence financial decision-making. Specifically, behavioral finance theory
suggests that people do not always make rational financial decisions, and that cognitive biases
can lead to suboptimal financial outcomes.
4. Institutional theory (Amenta and Ramsey, 2010): Institutional theory posits that organizations
conform to the norms and expectations of their institutional environment, in order to gain
 legitimacy and access resources. This theory may be useful in understanding how regulatory and
cultural factors influence SMEs' financial risk attitudes. For example, SMEs operating in
environments with stricter financial regulations may be more risk-averse, as they seek to avoid
penalties or negative perceptions from regulators

1.3 Empirical Review

The following include a few relevant literature related to determinants of financial risk attitude among
SMES.

One study titled "Determinants of Financial Risk Attitude Among SMEs in Ghana" (Asamoah, 2016)
investigated the factors that influence the risk attitudes of SME owners in Ghana. The study found that
factors such as age, education level, entrepreneurial experience, and perceived financial knowledge
significantly influence SME owners' financial risk attitudes.

Another study titled "Determinants of Financial Risk Attitudes among Retail Investors in Ghana" (Agyei-
Boapeah, 2019) explored the factors that influence the risk attitudes of retail investors in Ghana. The
study found that demographic factors such as age, gender, education level, and income level significantly
influence investors' risk attitudes.

Other studies have investigated the impact of cultural and institutional factors on financial risk attitudes in
Ghana. For example, one study titled "Culture and Financial Risk Attitude in Ghana" (Koomson & Poku,
2016) examined how cultural values and norms influence the risk attitudes of Ghanaian investors. The
study found that cultural factors such as collectivism and long-term orientation significantly influence
investors' risk attitudes.

Furthermore, differences in people's risk attitudes that affect their economic decisions and behavior can
be attributed to various factors. Factors such as age, gender, wealth, and other background characteristics
that vary across individuals can significantly explain variations in risk attitudes and therefore impact
economic decisions (Rahman et al., 2023). This has been extensively studied in existing literature, but
mostly in developed countries. Hence, findings from these studies cannot be generalized for emerging
economies such as Ghana (and/or sub-Saharan Africa) because of certain differences that exist.

3.0 Methodology

This study will adopt a mixed method approach. This will include both quantitative and qualitative data
collection and analysis techniques. This method was adopted because it will help provide more in-depth
understanding of the research issue. According to Maxwell, (2016), the integration of both qualitative
and quantitative data in research allows for a comprehensive and meaningful exploration of research
issues. This approach provides a sound foundation, methodological adaptability, and a detailed
comprehension of the various details of the research.

which can help to achieve more detailed findings and provide a more complete picture of the topic under
investigation. For example, quantitative data collected through surveys can help to identify patterns and
trends in SMEs' financial risk attitudes, while qualitative data collected through in-depth interviews or
focus groups can provide insights into the reasons behind those attitudes. Moreover, the qualitative data
can help to contextualize the quantitative findings and shed light on factors that may not be captured by
the surveys alone, such as organizational culture or the role of personal experience in shaping risk
attitudes. Using a mixed-methods approach can also help to overcome the limitations of using only one
method, and can increase the validity and reliability of the study's findings.

Population and Sample

The population of this study includes all SMEs in Ghana. Because it is statistically inconvenient to
analyze data for all SMEs, it is necessary to draw a sample from the population. This will be done using
stratified random sampling procedure. Stratified random sampling involves dividing the population into
subgroups, or strata, based on relevant characteristics, such as geographical location or industry sector.
The strata are then randomly sampled to ensure that the sample is representative of the population as a
whole.

Techniques For Data Collection and Analysis

The study will make use of the mix of techniques for data collection and analysis, due to the choice of
methodology. Thus, for qualitative method, the study will gather data primarily through semi-structured
interviews with participants (This includes a number of business owners and managers of sampled
SMEs). Interviews will be analyzed using content analysis to draw inferences from the data collected. For
quantitative data the study will use questionnaire design to collect data from considerable number of
owners and managers of sampled SMEs in Ghana.

The study will make use of both primary and secondary data. Primary data will be acquired through
interview and responses from questionnaire. Secondary data will be acquired from already published
research on any idea, topic that is related to the topic for this study, and also any document online,
information in data bases of businesses and regulatory documents – that might be relevant to the study.
References

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Amenta, E., & Ramsey, K. M. (2010). Institutional theory. Handbook of politics: State and
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Amoah, S. K., & Amoah, A. K. (2018). The role of small and medium enterprises (SMEs) to
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Belás, J., Bartoš, P., Ključnikov, A., & Doležal, J. (2015). Risk perception differences between
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