Technology in Society 64 (2021) 101519

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Technology in Society
journal homepage: http://www.elsevier.com/locate/techsoc

Analysing the roles of CEO’s financial literacy and financial constraints on

Spanish SMEs technological innovation
Domingo García-Pérez-de-Lema a, Daniel Ruiz-Palomo b, *, Julio Diéguez-Soto b
a
Department of Accounting and Finance, Faculty of Business Studies, Technical University of Cartagena, Calle Real, 3, 30201, Cartagena, Spain
b
Department of Accounting and Finance, Faculty of Economics and Business Administration, University of Málaga, Campus de El Ejido, 6, 29071 Málaga, Spain

A R T I C L E I N F O A B S T R A C T

JEL classification: Drawing on human capital and upper echelons theories, this study analyses how CEO’s financial literacy in­
O32 fluences a firm’s technological innovation and investigates the mediating role of alleviating financial constraints
G53 of Small and Medium-sized Enterprises (SMEs) in the former relationship. We develop and test hypotheses
G32
applying a Structural Equation Model to a sample of 310 Spanish SMEs. The results show that CEO’s financial
Keywords: literacy exerts both a direct and an indirect impact, through alleviating financial constraints, on a firm’s tech­
Financial literacy
nological innovation.
Financial constraints
Technological innovation
SMEs

1. Introduction
Financing plays a fundamental role in firm innovation [1,2] and
represents a central research topic in finance and innovation manage­
ment [3,4]. Accessing to financial resources allows organizations to
invest strategically in the production factors necessary to develop
competitive advantages [5]. However, SMEs often face financial re­
strictions to accessing the credit market and this limits their develop­
ment [6]. Innovating often depends on the availability of cash, so
financial constraints can be a serious obstacle to driving the firm inno­
vative activity [7]. These decisions always have financial consequences
and therefore, to be effective, entrepreneurs must have solid financial
literacy [8]. Financial literacy is one of the most relevant skills for the
development of SMEs [9], by minimizing the obstacles that occur in the
credit market.
Although there is abundant literature on the relationships between
financing and innovation, the role played by the financial literacy of the
SME manager has been little explored [10]. The literature suggests that
people with more financial literacy are more likely to participate in a
wide range of recommended financial practices [11]. Therefore, finan­
cial literacy is an important tool for managing business finances [12].
However, financing is one of the main problems that SMEs face con­
cerning their innovation activities [13] and one of the causes is the lack
of financial skills of the owner or manager [14]. For this reason, it is
important to analyse the mechanisms that SMEs managers have to
promote access to financing and to be able to carry out their innovation
activities. Previous research suggests that managers with a good finan­
cial literacy participate more actively in financial markets, by reducing
information restrictions [15] and achieving more favourable access to
credit [10]. Financial literacy, therefore, alleviating financial con­
straints, may be an important antecedent of technological innovation.
The objective of this work is to analyse, in the context of SMEs, the
influence of financial literacy and financial restrictions on their capacity
for technological innovation. For this, an empirical study is carried out
on a sample of 310 Spanish SMEs, which have between 10 and 250
workers. The key research questions that this paper answers are: Can
financial literacy help to reduce financial constraints for SMEs? Can
financial literacy favour the outcomes of technological innovation
directly? And indirectly, alleviating financial constraints? To address the
former inquiries, we combine human capital and upper echelons
frameworks to elucidate that the CEO’s financial literacy, as one of at­
tributes of top executives, enhances organization human capital
endowment, and in turn, affects firm innovation. The answers to these
questions have important implications, for both the firms’ management
and the establishment of public policies. The Spanish setting is espe­
cially interesting. The financing of technological innovation activities

* Corresponding author.
E-mail addresses: domingo.garcia@upct.es (D. García-Pérez-de-Lema), drp@uma.es, druizpalomo@gmail.com (D. Ruiz-Palomo), jdieguez@uma.es (J. Diéguez-
Soto).

https://doi.org/10.1016/j.techsoc.2020.101519
Received 13 July 2020; Received in revised form 1 December 2020; Accepted 24 December 2020
Available online 9 January 2021
0160-791X/© 2020 Elsevier Ltd. All rights reserved.
D. García-Pérez-de-Lema et al.
continues to be a limitation for Spanish firms [16]. Although various
financial institutions are making a major effort to spread financial lit­
eracy [17], their position in relation to Europe is low [18,19]. In this
context, transmitting to SMEs the benefits of financial literacy to
augment their knowledge capacities [20] and facilitate innovation
through proper management of their financial objectives [21], may be a
key factor in driving technological innovation.
Financial literacy has been widely researched in the literature to
examine the effects of financial literacy on individuals and households
[22,23], but few papers have analysed the influence of financial literacy
at the firm level. This paper adds to the existing literature on financial
literacy on firms and provides new and important findings. Furthermore,
this study contributes to the abundant literature on determinants of
technological innovation. This article contributes to the growing
empirical evidence regarding how financial literacy affect firm innova­
tion in SMEs, which is still scarce, enriching the application of human
capital and upper echelon theories. Specifically, this study demonstrates
that technological innovation of SMEs can benefit from CEO’s financial
literacy doubly: from the positive direct effect but also from the
favourable mediating role of alleviating financial constraints. In this
sense, we provide empirical evidence about how much of the positive
effect of financial literacy on technological innovation is due to the fact
that SMEs with more financial literacy have better access to financing,
inasmuch that greater investments in innovation can be allowed.
Finally, the results obtained in the study include important managerial
and public policy implications that reinforce the strategy of investing
resources in improving financial literacy in SMEs to enhance, in the end,
firm innovation.
This study has been structured in the following way: first, we
determine the theoretical framework and develop research hypotheses.
Second, we present the methods: the sample selection, data collection
and variables definition. Third, we carry out the analysis of the results,
and finally, we present the main conclusions, implications and future
lines for research.
2. Literature review and hypotheses development
2.1. Financial literacy and technological innovation
Firm knowledge is one of the attributes considered necessary to
improve human capital, along with other aspects such as skills or ca­
pabilities, which may be turned into productivity [24], being essential to
innovate [25,26]. Human capital improves firm innovation and perfor­
mance [27], while the lack of human knowledge diminishes the business
innovation activities [28].
Education augments the capacity to innovate and increases the use of
new technologies [29], improving the ability to receive and understand
information [30]. Thus, highly educated employees, increasing busi­
ness’ knowledge and easing the entrance of external knowledge,
enhance the competence of the business to innovate [31]. In this vein,
firm knowledge and expertise can be considered drivers of technological
innovation [32], since it increases both business’ absorptive capacity
and the likelihood of making the most of external technological spill­
overs [33]. Particularly, entrepreneurs and CEOs with high degrees of
knowledge are more inclined to carry out innovative projects instead of
opting for more conservative alternatives [34]. Thus, the higher is the
executives’ education, the more profound is their comprehension of the
relevance of firm innovation [35].
Prior literature on human capital framework has practically dis­
regarded financial literacy as a crucial factor explaining risk-taking and,
in turn, innovative behaviours [36], despite financing literacy is
contemplated as one of the unique managerial abilities in SMEs [9].
Firms, and particularly their CEOs, should be financially literate to
manage decision-making process effectively, as this fact usually has
financial repercussions [8]. Financially literate CEOs will be qualified to
make better decisions regarding the trade-off between risk and returns
2
Technology in Society 64 (2021) 101519
from different substitute projects. Thus, financially literate CEOs will be
able to recognize greater financial payoffs from R&D investments, which
they can contribute to generate higher firm performance and competi­
tiveness [36]. Consequently, entrepreneurs with a greater human capi­
tal, and more specifically with a higher financial literacy, are expected to
have a greater organizational capability [37] and consequently achieve
better levels of firm performance [38]. Moreover, recent research sug­
gests that an enhanced perception of entrepreneurial competencies, such
as financial literacy, can lead entrepreneurs to move forward in the
entrepreneurial process [39].
Furthermore, and based also on upper echelons theory, we can
highlight how the specific features of CEOs, namely their financial lit­
eracy, influence on corporate decisions, and more specifically on firm
innovation. Drawing on studies addressing the impact of CEO’s personal
features in firm innovation [40], it has been confirmed that more
educated executive teams will opt more for innovation investments
[41]. In this vein, previous empirical studies have showed that executive
financial literacy influences significantly innovation, revealing that
greater awareness, appropriate expenses and income management, and
focus on long-term financial objectives enhance business’ innovation
[21]. Likewise, deliberate, grounded financial planning, the employ­
ment of financial experts, the attitude towards funding of management,
and the adaptation of novel banking solutions, all of them elements of
the firm financial-management culture, are critical driving determinants
of innovation [42]. Very recent research has also confirmed that exec­
utive financial literacy substantially enhances SMEs firm innovation
[43] and how financially literate entrepreneurs, recognizing the po­
tential convex financial payoffs of R&D investments, influence firm
innovation [36].
Consequently, and based on human capital and upper echelons
theories, we argue that financial literacy improves human capital
endowment and CEOs financial literacy will change firm innovation,
and propose the following hypothesis:
H1. CEO’s financial literacy impacts positively on technological
innovation outcomes
2.2. The mediating effect of alleviating financial constraints
SMEs research has addressed profusely how firms pursue to build an
optimal capital structure [44] or deal with financing challenges [45].
Yet, achieving an optimal capital structure or choosing the appropriate
type of financing, demand a certain degree of financial literacy [15].
Financial literacy can be construed to be a valuable, rare and inim­
itable resource [46], as it impacts on the extent to which managers are
capable to make efficient decisions with regards to financing and di­
minishes the constraints they often face when attempting to access to
finance [47]. Financial literacy enables firm managers with appropriate
financial knowledge to generate budgets, manage savings plans and
carry out strategic investment opportunities [48], enhancing also busi­
ness’ financial practices [49]. Financially literate managers are able to
assess and understand properly distinct financing sources and to cope
with intricate indebtedness application procedures, improving the sorts
of financing obtained [50]. Financially illiterate managers, on the con­
trary, due to their deficient management skills and knowledge, can
suffer from both the lack of knowledge with regards to financing options
and also the consequent financial constraints [15]. Therefore, managers’
financial literacy is a key knowledge resource for financial decision
making [20] that favors accessing to finance for SMEs [47]. Why does
financial literacy relieve financial constraints? Financial literacy miti­
gates information asymmetry and reduces monitoring costs [51,52].
Information asymmetry limits the debt offerings [53,54] and it appears,
among other reasons, because the costs of searching for financial in­
formation can vary between borrowers or lenders [55]. Financial liter­
acy helps SME managers to provide decision makers, such as creditors,
with better quality information [56]. Hence, it is necessary to improve
D. García-Pérez-de-Lema et al.
information flows and financial literacy in SMEs in order to overcome
information asymmetry and loan restrictions in the market [15].
Previous studies have confirmed that financial literacy is quite
relevant to beat difficulties in achieving proper and balanced business’
financial capital [57]. Financial literacy can also ease the
decision-making processes related to payments of bills on time or debt
management, enhancing the confidence of lenders [58]. An augmented
requirement of financial services, more saving plans, better debt man­
agement or more proper risk management, which are recognized
favourable consequences of financial literacy, can also lead to increasing
the trust of financial institutions towards the business [59]. Therefore,
CEO’s financial literacy can be an efficient tool for SMEs against
financial constraints [60].
On the other hand, financial constraints, due to imperfections in
capital markets, can be an obstacle to firm innovation [61,62]. In­
vestments in innovation require financial resources [63], but innovation
involves a heterogeneous, asymmetric and complementary nature [64].
Investments in innovation are normally characterized by a high degree
of uncertainty [65], which causes information asymmetries and diffi­
culties for external investors to determine the potential value of the
projects [66]. And all this is more accentuated in new firms that can see
how financial restrictions distort their investment and innovation de­
cisions [67] and in small firms and high-tech sectors [68]. Thus, and due
to these asymmetries, it can be difficult and expensive for firms
obtaining external funds, to finance their investments [69]. Further­
more, these frictions of asymmetries are not reduced by the availability
of guarantees [13]. R&D and innovation activities are often firm-specific
and therefore have little collateral value [70].
The empirical literature on the relationship between financial con­
straints and innovation is not entirely conclusive. Although previous
studies show how financial constraints hinder innovation activities
projects [66,71], there is also some previous research revealing that
firms with capital limitations tend to report their innovation perfor­
mance better than unrestricted firms and this provokes a positive effect
on innovation [28]. However, most of the works focused on SMEs have
found a negative relationship between financial constraints and tech­
nological innovation, showing how financial constraints limit innova­
tion, regardless of the context of the geographic contexts analysed: UK
[72], Italy [13], Spain [73] or Sweden [74]. One of the main arguments
that justifies such a negative relationship is that banks consider R&D&I
to be risky investments, given the high level of uncertainty related to
Fig. 1. Research model.
3
Technology in Society 64 (2021) 101519
innovative SME [75].
In short, financially illiterate owners-managers will likely lead to a
decrease in technological innovation, given that their lack of financial
knowledge does not allow them to gain access to the existing financing
opportunities [76,77], provoking even the failures of SMEs [78]. On the
contrary, financially literate owners-managers can alleviate financial
constraints, which may substantially improve the firm’s capacity to
undertake innovation, among other goals [79]. Overall, this study con­
tends that greater CEO’s financial literacy will lead to higher techno­
logical innovation outcomes through the relief of financial constraints.
Consequently, we proprose the following hypothesis:
H2. Alleviating financial constraints mediates the relationship be­
tween CEO’s financial literacy and technological innovation, so that
CEO’s financial literacy has a positive indirect effect on technological
innovation outcomes.
Based on the previous arguments, we present the research model in
Fig. 1. The model examines the direct effect between financial literacy
and innovation (H1), as well as the indirect effect through the reduction
of financial constraints (H2). In this sense, testing H2 requires to specify
a path from financial literacy to alleviating financial constraints (H2a),
and other path from the former to innovation (H2b).
3. Method
3.1. Data
To carry out the empirical study, a sample of 310 Spanish SMEs has
been used. The population of firms was obtained from the Spanish
Central Business Directory [80]. The population of this study is Spanish
SMEs with a size between 6 and 250 employees and was segmented
according to two criteria: activity and size. The sectors have been
established based on the classification in Manufacturing, Construction,
Commerce and Services and the size strata of 6–9 employees, 10 to 49
employees, and 50 to 250 employees. This was in order to make the
sample representative and proportional to the population of firms ana­
lysed. The sample selection framework was the SABI database provided
by Informa D&B SAU (it includes a directory with information on the
telephone numbers, sector and size of the firm). To select the sample, we
follow the principles of stratified sampling for finite populations. The
sample size was set to achieve a total margin of error of less than 0.05
D. García-Pérez-de-Lema et al.
points with a confidence level of 95%. Firms with less than 5 employees
were excluded, due to the difficulty of obtaining information for this
type of firm [e.g. 20].
The information collection technique was achieved through a tele­
phone survey. The survey was carried out by the firm Consultores SA. The
questionnaire was addressed to the manager of the SME. Managers are
who make the most important decisions [81] and largely express their
opinion on the strategic behaviour of the firm [82]. Before preparing the
definitive questionnaire, a pre-test was carried out with 10 SMEs to
verify its viability, modifying those suggestions that improved the
interpretation of the questionnaire [83]. The field work was carried out
during the period October 2016–January 2017. Control tests were
implemented in the process of preparing the survey. We would like to
point out that in the development of the different phases of this research
the statistical secrecy of the information used has been scrupulously
respected. The distribution according to the strata set in the sampling
and its corresponding sampling error is shown in Table 1.
3.2. Measures
3.2.1. Financial literacy
Financial knowledge is generally measured through knowledge tests
on financial concepts (interest, inflation, risk diversification and riski­
ness of financial products, etc.) creating a variable from the percentage
of correct answers [34]. However, financial knowledge concept leaves
out the possibility of assessing the ability to manage financial knowledge
and the decision-making process of financial decisions in the firm. This is
why, this study has focused on the financial literacy concept, which
includes not only personal finance knowledge (understanding) but also
personal finance application (use) [84]. Furthermore, the measurement
of financial literacy from the perspective of the firm CEO has received
little attention from researchers and there are few studies that have
focused on this topic [85]. Considering the limited prior studies on
financial literacy at a firm level [86,87] and also considering the
particular characteristics of our sample, we proposed several items to
quantify both the manager’s ability to understand and analyse financial
information and the application of it in the decision making process
[88]. Thus, we have built a multidimensional construct with 7 items
addressed to the firm’s CEO. This construct collects mainly the CEO’s
perspective of its access management to economics and financial infor­
mation, the generation of a financial knowledge base and the firm’s
capacity to make financial decisions [47].
3.2.2. Financial constraints
There is not a clear consensus regarding how measuring firm finan­
cial constraints. A first stream of authors uses accounting variables [89].
However, other authors argue that the utilization of ratios as an
approximation to financial restrictions do not always accurately reflect
the reality of each firm, since it is not known whether the lenders have
rejected the loan application or whether the firm simply has not
requested it. As a consequence, there is a need for carrying out firm
surveys to determine the situation of financial constraint [e.g. 66]. To
measure how the firm achieves alleviating financial constraints, we have
Table 1
Sample distribution and sample error per group.
n % Sample error (95% confidence)
Less than 10 workers 111 35.8% 9.3%
From 10 to 49 workers 130 41.9% 8.6%
From 50 to 250 workers 69 22.3% 11.8%
Manufacturing 98 31.6% 9.9%
Construction 90 29.0% 10.3%
Trade & Commerce 60 19.4% 12.7%
Services 62 20.0% 12.4%
Total 310 100.0% 5.6%
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Technology in Society 64 (2021) 101519
asked respondents to rate from 1 (very unfavourable) to 5 (very
favourable) the evolution in the last two years of the main aspects of the
bank financing offers to which they have had access.
3.2.3. Technological innovation
In harmony with prior research [90] and based on the process-based
conceptualization of technological innovation [91], we have identified
two types of technological innovation: product innovation and process
innovation. We have focused our study on technological innovation
because previous research shows that both product and process in­
novations shape firm competitive advantage [92]. Given that the use of
the number of patents or patent citations to measure technological
innovation can undervalue SMEs innovation [93], we have used both
product and process innovation. We utilized both objective and sub­
jective questions to assess technological innovation. Objective approach
includes items regarding the number of new products or services or the
number of new process innovations. Subjective approach contains
questions concerning the pioneer nature to the market of the new
product and process innovations and the speed of answering to new
products or process innovations introduced by the competence [94]. The
subjective approach is particularly suitable in SMEs since the objective
approach is inclined to underrate SMEs innovative activity [95].
Consequently, we used two groups of items to capture technological
innovation. Similar to previous literature [96], the first group made up
of 3 items measures product innovation, while the second group of three
items assesses process innovation. All of them are measured through
5-points Likert scale.
3.2.4. Control variables
We introduce a set of control variables. First, we include three items
to measure the firm risk orientation dimension [97,98]. Second, we
consider firm size, firm age and firm industry [67,68,99]. Third, we
include other control variables regarding the firm CEO: gender [100],
studies and age -as a proxy for his/her experience- [101]. Finally, we
also incorporate the ROA [72] and leverage indicators [102]. Table 2
summarizes the variables used in our model.
3.3. Measurement checks and control of biases
We conducted exploratory and confirmatory analyses using Stata
(v.14) to assess the reliability and validity of the variables. We firstly run
an Exploratory Factor Analysis (EFA) based on principal components
factors [103]. Results identified 8 significant factors (eigenvalue>1)
explaining 65.16% of the common variance (21.8%, 11.3%, 9.1%, 5.6%,
5,2%, 4,2%, 4.0% and 3.9% respectively), Cronbach’s α = 0.245. In the
varimax rotation, main factors are respectively corresponding to Alle­
viating Financial Constraints (13.8% of variance), Financial Literacy
(13.1%), Technological Innovation (12.7%), and Risk Orientation
(7.4%), measures; the rest of the factors mainly reflect control variables.
Secondly, we performed a two steps Confirmatory Factor Analysis
(CFA): The first step single-factor model [104] psychometric properties
were not satisfactory (χ2 = 1340.3; SRMR = 0.146; RMSEA = 0.144; CFI
= 0.633; TLI = 0.575 AVE = 0.247); moreover, none of the loadings
were up to 0.70. The second step model performs the proposed four
factors model explained below, with adequate psychometric properties
since all the values are within the acceptable range [105] (SRMR =
0.047, CD = 0.999, NFI = 0.905. Satorra-Bentler χ2: 286.2, RMSEA =
0.045, CFI = 0.960; TLI = 0.952. OIM χ2 = 325.8, RMSEA = 0.053
[0.044, 0.062], CFI = 0.952; TLI = 0.943). Further, we assessed that the
first step model is not nested in the second step model (log-likelihood
ratio test χ2 = 1014.45***).
Furthermore, we used the common latent factor (CLF) approach as a
confirmatory method to capture the common variance among all
observed variables in the model. Therefore, we added a latent factor to
our SEM model and then connected this to all observed variables. The
comparison between the standardized regression weights of the two
D. García-Pérez-de-Lema et al. Technology in Society 64 (2021) 101519

Table 2
Variables definition.
LV MV Description Refs.

FL Please rate from 1 (absolutely disagree) to 5 (absolute agree) the following sentences: [47,85]
Financial fl1 I have updated information regarding economic and financial industry data
Literacy fl2 I am well informed about the economy evolution and of the national and international monetary and financial policies
fl3 I am well informed about alternative financial sources (equity loans, venture capital, MAB, business angels, etc.) rather than bank
financing
fl4 I am well informed about the financial assets in which I can invest financial slack
fl5 I use economic and financial information in the decision-making
fl6 The training of the administration and finance department staff is very relevant for establishing effective financial policies
AFC Please rate from 1 (very bad) to 5 (very good) the evolution during the last 2 years regarding: [66]
Alleviate afc1 the indebtedness offered to the firm
Financial afc2 the costs and commissions required
Constraints afc3 the guarantees needed
afc4 the interest rate
afc5 the time-lapse response of the financial institution
afc6 the debt maturity
TI Please rate from 1(very bad) to 5 (very good) the evolution of your company related to the competitors during the last 2 years regarding: [95,96]
Technological ips1 the number of new products or services introduced by your company per year
Innovation ips2 the pioneering character of your company when introducing new products or services
ips3 the speed in response to the introduction of new products or services by other companies in the industry
ipp1 the number of changes in the processes introduced by your company per year
ipp2 the pioneering character of your company when introducing new processes
ipp3 the speed in response to the introduction of new processes by other companies in the industry
Control variables
RO Please rate from 1 (absolutely disagree) to 5 (absolute agree) the following sentences: [97,98]
Risk ro1 I have a strong propensity to projects with high risk
Orientation ro2 I believe that understanding brave far-reaching environment actions is necessary to reach the companies objectives
(cv1) ro3 When I make decisions under uncertainty conditions, I usually adopt a strong and aggressive position to maximize the probability of
exploiting the potential opportunities
Other cv2 Firm age [67,68,
Firm cv3 Firm size 99]
Characteristics cv4 Industry: 2-digits NACE code
Firm cv5 ROA (EBIT/Total Assets) [72,102]
Efficiency cv6 Leverage (Total Debt/Total Assets)
CEO cv7 CEO Age [100,
Characteristics cv8 CEO gender 101]
cv9 CEO education

LV: Latent variables. MV: Manifest Variables.

models (with and without the CLF) showed small differences (that is,
less than ±0.0062 on all dimensions). Still, variance inflation factors
(VIF) of all the measures were below 3 (max. VIF = 2.89). In addition,
we analysed non-response bias to guarantee the validity and quality of
the data [106]. The applied tests show that this bias is not relevant in our
study. These results suggest that neither non-response bias nor collin­
earity nor common method variance were a problem since no single
factor accounted for the majority of the variance [107], the individual
factors separated performs significantly better than the single factor
model, and the standardized regression weights did not significantly
vary by adding a common latent factor [108]. Hence, these tests guar­
antee the consistency and reliability of the data.
We also tested the validity of the scales. Table 3 reports the reliability
and convergent validity (panel A) as well as the HTMT ratios and the
Fornell-Larcker criteria to assess discriminant validity (panel B).
Most factor loadings were up to 0.70, and not one was below 0.60 for
a threshold of 0.40; furthermore, Average Variance Extracted were up to
0.50, while Cronbach’s alpha and Composite Reliability values were up
to 0.70. Moreover, all standardized regression weights are significant.
These results indicate the convergent validity of the latent variables
[105]. In addition, all the HTMT ratios are below 0.85 [109,110] and
inter-factor correlations are lower than the squared root of AVEs [111].
These findings suggest the discriminant validity of the model.
4. Results
4.1. Hypotheses testing
Table 4 and Fig. 2 report the structural model results.
The effect of financial literacy on technological innovation is positive
and significant (β = 0.18**), supporting H1, and suggesting that such
managerial ability in SMEs may provoke greater innovation capabilities
[21,42].
Furthermore, financial literacy significantly contributes to allevi­
ating financial constraints (β = 0.24***) [47] and alleviating financial
constraints positively influences on technological innovation (β =
0.17***). Our results suggest that financial literacy affects technological
innovation through the relief of financial constraints. In this sense, the
indirect effect of financial literacy on technological innovation through
alleviating financial constraints is positive and significant (β = 0.04**),
supporting H2. Moreover, to assess the mediation hypothesis, we fol­
lowed the Baron and Kenny approach [112], adjusted for its use with
SEM [113] (t = 2.08**), as well as the Zhao approach [114] using Monte
Carlo tests [115] (t = 2.09**). Our results suggest that relaxing financial
constraints partially mediates the relationship between financial literacy
and technological innovation, since both direct and indirect effects are
significant, and indirect effect represents 19% of the total effect (see
Table 4).
Regarding control variables, risk orientation positively and strongly
affects technological innovation (β = 0.37***). Likewise, firm industry
(β = − 0.17***) and firm size (β = 0.18***) strongly affect financial
constraints: manufacturing firms seem to have an easier access to
financing than trade and services firms. Likewise, the larger the firm, the
greater the relaxing of financial constraints. Furthermore, firm ROA (β
= 0.10*) and firm age (β = − 0.12**) also affect financial constraints. No
other direct effect is significant (see Table 4).
4.2. Control of endogeneity and robustness checks
Endogeneity issues may be encountered, which would prevent ruling

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D. García-Pérez-de-Lema et al. Technology in Society 64 (2021) 101519

out the possibility of firm innovation influencing CEO’s financial liter­ professionalized, and consequently the level of financial literacy will be
acy. Firm innovation is a knowledge intensive process that requires in­ higher. Simultaneously, it is to be expected that a CEO with a higher
dividual and organizational knowledge [116]. Firm innovation would education level is more likely to be financially literate. Table 5(a) assess
be unthinkable without an intentional and continued knowledge endogeneity combining an IV approach and the use of a new control
acquisition process [117]. By firm innovation, organizations impact on variable: the liquidity ratio. In a SEM environment, endogeneity may be
the orientation of their learning effort and condition the behaviour of identified by a significant correlation of errors in dependent variables.
firm members [118]. Therefore, we should consider that as firm inno­ Thus, we create four models using instruments. Model 1 outlines the
vation is basically risky and complex in nature, it will affect firm finance correlation between financial literacy and both technological innovation
[119] and, in turn, it will motivate firms to be more engaged in and alleviating financial constraints. Models 2 and 3 are performed
increasing CEO’s financial literacy. drawing such correlations individually. Finally, model 4 does not allow
Endogeneity can have many sources, such as measurement error or the correlation between errors. These covariances are not significant in
simultaneity [120,121]. But endogeneity often results from omitted any case, suggesting that endogeneity is not a problem. Further,
variables, so researchers fail to identify all the relevant independent Log-likelihood ratio tests suggest that model 4 is nested in all the pre­
variables to explain the dependent variable [122]. In this sense, the use vious models, suggesting that it is preferable. Furthermore, Akaike (AIC)
of control variables and/or the use of instrumental variables (IV) are the and Bayesian (BIC) information criteria for selection purposes suggest
most prominent approaches to assess endogeneity. Several instruments that model 4 is better than the previous ones. Hence, endogeneity ap­
have been developed for checking the endogeneity of financial literacy pears not to be a problem.
(see, e.g., Ref. [123]). However, no IVs for financial literacy have been Gaussian copulas represent a more recent approach to address
identified in the business context, to the best of our knowledge. We then endogeneity issues [124] without identifying suitable IV or control
used two instruments to do it: the existence of a board of directors and variables. In addition, the Gaussian copula approach not only allows the
the educational level of the CEO. It is to be expected that firms where identification of endogeneity issues, but also their handling. The appli­
there is a board of directors, the management will be more cation of the approach based on Gaussian copulas has been carried out as
described in Ref. [121]: We use the factors’ standardized scores to
compute the Gaussian copula of the regressions in the structural model
Table 3 after assessing their non-normality distribution. Then, we calculate OLS
Descriptive statistics, Reliability and validity of measures. regressions, by replicating the original model (model 5), and including
PANEL A: Descriptive statistics and Convergent validity the Gaussian copula (model 6). The effect of the Gaussian copula is not
significant in either equation explaining the technological innovation or
Mean SD λ s.e.***
adjusting the decrease on financial constraints. Further, path betas do
FL – Financial Literacy not vary significantly. Hence, endogeneity seems not to be relevant in
fl1 3.59 1.27 0.71 0.04 0.88
this context.
α
fl2 3.58 1.19 0.73 0.04 AVE 0.52
fl3 3.24 1.29 0.72 0.04 CR 0.87 In addition, several modifications in our model have been imple­
fl4 3.11 1.32 0.73 0.03 mented to test its robustness. First, we categorized the industry variable
fl5 3.67 1.23 0.74 0.03 in four dummies: manufacturing, construction, commerce, and services.
fl6 3.73 1.04 0.69 0.04
Second, the size of the firm, originally measured through the number of
AFC – Alleviating Financial Constraints
afc1 3.42 1.28 0.71 0.04 α 0.89
employees, was reorganized into three dummies: micro, small and me­
afc2 2.77 1.27 0.76 0.03 AVE 0.56 dium size firms. Third, the experience of CEO -years managing the firm-
afc3 2.80 1.30 0.76 0.03 CR 0.88 substituted the age of the CEO. Fourth, the number of banks operating
afc4 2.77 1.22 0.75 0.03 the firm and the liquidity ratio were also added. Moreover, several bi­
afc5 3.16 1.25 0.74 0.03
nary variables were also added: international firms, existence of a Board,
afc6 3.16 1.15 0.76 0.03
TI – Technological Innovation
ips1 3.20 1.15 0.60 0.04 α 0.87
ips2 3.33 1.18 0.72 0.03 AVE 0.52 Table 4
ips3 3.09 1.07 0.64 0.04 CR 0.86 Results.
ipp1 3.12 1.08 0.72 0.04
Test Path β s.e. t
ipp2 3.13 1.22 0.86 0.02
ipp3 2.96 1.01 0.73 0.03 Direct effects
RO – Risk Orientation H1 Financial Literacy → Technological 0.18 0.08 2.29**
ro1 2.08 1.16 0.69 0.03 α 0.78 Innovation
ro2 3.20 1.19 0.77 0.03 AVE 0.54 H2a Financial Literacy → Alleviate Financial 0.24 0.08 3.18***
ro3 3.02 1.16 0.75 0.04 CR 0.78 Constraints
One-item control Mean SD Mean SD H2b Alleviate Financial Constraints → 0.17 0.06 2.75***
variables Technological Innovation
Firm age 22.70 13.39 CEO age 51.04 10.03
Indirect effects
Firm size 30.32 47.60 CEO Education 1.76 0.65
H2 F. Literacy → Alleviate F. Constraints → 0.04 0.02 2.09**
ROA 0.06 0.10 Leverage 0.56 0.34
Tech. Innovation
Nominal NACE code ranged 08 - 93 Gender 0.13 –
Sobel test: 2.08**. RIT: 19%. RID: 23%
PANEL B: Discriminant Validity
significant control variables
FL AFC TI RO Industry → Alleviate F. Constraints − 0.17 0.06 − 2.87***
Financial Literacy 0.72 0.31 0.43 0.37 Firm age → Alleviate F. Constraints − 0.12 0.06 − 1.96*
Alleviate Financial Constraints 0.28 0.75 0.43 0.06 Size → Alleviate F. Constraints 0.18 0.05 3.61***
Technological Innovation 0.39 0.27 0.72 0.44 ROA → Alleviate F. Constraints 0.10 0.05 1.89*
Risk Orientation 0.37 0.08 0.45 0.74 Risk Orientation → Tech. Innovation 0.37 0.07 5.54***

PANEL A: SD: Standard Deviation; λ: Standardized loadings; s.e.: standard error;
α: Cronbach’s alpha. AVE: Average Variance Extracted. CR: Composite Reli­
ability. ***: All the loadings are significant at a p < 0.01 level.
PANEL B: Fornell-Larcker criterion: Squared-Root of AVE in diagonal (cursive)
and factors correlations below the diagonal. HTMT ratios over the diagonal
(bold).
Standardized betas, standard errors and t-statistics reported. R2 TI: 0.30; R2 AFC:
0.17. RMSEA [90% CI]: 0.044, [0.037, 0.052]. p-close: 0.899. SRMR: 0.042. CD:
0.969. Satorra-Bentler RMSEA: 0.041 CFI: 0.948 TLI: 0.937. Additional post­
estimation tests: Max VIF [TI: 1.56, AFC: 1.48]. Breusch-Pagan test (p-value) [TI:
2.02 (0.156), AFC: 0.4 (0.525)]. Omitted variables Ramsey test (p-value) [TI:
0.73 (0.537), AFC: 1.03 (0.379)]. *: p < 0.1; **: p < 0.05; ***: p < 0.01.

6
D. García-Pérez-de-Lema et al. Technology in Society 64 (2021) 101519

Fig. 2. Results.

Table 5
(a). Tests of endogeneity (I): Instruments and control variables approach.
Model 1 Model 2 Model 3 Model 4

β t β t β t β t

A) Financial Literacy R2:0.30 R2:0.30 R2:0.30 R2:0.30

Board 0.12 1.61 0.16 2.80*** 0.11 1.61 0.15 2.64***
No of banks 0.21 3.86*** 0.19 3.04*** 0.22 4.02*** 0.20 3.33***
Risk Orientation 0.36 6.03*** 0.36 5.98*** 0.36 6.03*** 0.36 5.98***
Firm Age 0.12 2.11** 0.12 2.01** 0.13 2.13** 0.12 2.04**
ROA 0.11 1.94* 0.11 1.94* 0.11 1.94* 0.11 1.94**

B) Allev. F. Const. R2:0.07 R2:0.18 R2:0.06 R2:0.18

F. Literacy 0.50 1.95* 0.25 3.46*** 0.64 2.10** 0.25 3.46***
Firm Age − 0.15 − 2.32** − 0.09 − 1.46 − 0.14 − 1.83* − 0.09 − 1.46
Industry − 0.15 − 2.39** − 0.14 − 2.29** − 0.14 − 2.07** − 0.14 − 2.29**
Size 0.13 1.96* 0.16 2.76*** 0.09 1.17 0.16 2.76***
Leverage − 0.12 − 1.83* − 0.12 − 2.00** − 0.11 − 1.60 − 0.12 − 2.00**
Acid test ratio − 0.12 − 3.23*** − 0.13 − 2.19** − 0.12 − 1.80* − 0.13 − 2.19**

C) Techn. innovation R2:0.31 R2:0.30 R2:0.32 R2:0.32

Allev. F. Constraints 0.23 2.41** 0.20 3.00*** 0.20 3.04*** 0.20 3.03***
F. Literacy 0.35 1.65 0.34 1.44 0.20 2.78*** 0.21 2.86***
Risk Orientation 0.32 3.12*** 0.32 3.13*** 0.37 5.72*** 0.37 5.70***
Acid test ratio 0.03 0.51 0.13 2.14** 0.12 2.11** 0.12 2.10**

Indirect effect
FL → AFC → TI 0.13 1.50 0.05 2.25** 0.13 1.78* 0.05 2.27**

Errors correlations coef. t (p – val.) coef. t (p – val.) coef. t (p – val.) coef. t (p)
[e.FL, e.TI] − 0.07 − 0.28 (0.78) − 0.15 − 0.62 (0.54) – – – –
[e.FL, e.AFC] − 0.35 − 1.39 (0.17) – – − 0.37 − 1.50 (0.13) – –

LR tests χ2 p Model selection criteria

Model 1 vs. Model 2 1.71 0.19 Model AIC BIC

Model 1 vs. Model 3 0.08 0.78 Model 1 31,555 32,000
Model 1 vs. Model 4 2.09 0.35 Model 2 31,554 31,995
Model 2 vs. Model 4 0.37 0.54 Model 3 31,553 31,994
Model 3 vs. Model 4 2.01 0.16 Model 4 31,553 31,990

These models were performed without the Satorra-Bentler adjustment to allow LR tests. Equations were specified including the following control variables: Risk
Orientation, Firm Age, Industry, Size, CEO age, CEO gender, CEO education, ROA, Leverage, and Acid test ratio. Independent variables without significant re­
lationships are not displayed due to dimension constraints. GOF indices of Model 4 are: RMSEA: 0.043; χ2: 572.50; CFI: 0.937; TLI: 0.924; SRMR: 0.043; Coefficient of
determination: 0.861. *: p < 0.1; **: p < 0.05; ***: p < 0.01.

family owned firms and family managed firms. These changes did not
affect the significance of our hypothesised results in any model.
Furthermore, we tested different four-by-four combinations of the
original items on measuring Financial Literacy, by eliminating two of
them each time. Our results were always consistent with our model -not
reported due to space limitations-. Finally, we also substituted the
measures of financial literacy with four reflective indicators that might
be highly correlated with this latent variable: The degree of imple­
mentation of budget controls, the level of use of financial statement
analysis, the degree of execution of internal audit, and the relevance of
the CFO opinion in management decisions. These questions do not
certainly measure completely the financial literacy of the CEO, but it is
expected that the higher the CEO’s financial literacy, the greater the
implementation of these management tools and the more relevant the
opinion of the CFO for decision-making. Then, CEO’s financial literacy
might be reflected in these indicators.
Thus, Table 6 compares the original model with three alternative
ones in unstandardized terms: model 7, that maintains the original
measure of financial literacy changing covariates; model 8, that varies
the original covariates changing the measure of financial literacy, and

7
D. García-Pérez-de-Lema et al.
Table 5
(b). Tests of endogeneity (II): Gaussian copula approach.
Path Copula
Equation - Models Uβ t Uβ t
FL → TI - model 5 0.17 2.95***
FL → TI - model 6 0.18 2.81*** − 0.01 − 0.26
FL → AFC - model 5 0.29 4.61***
FL → AFC - model 6 0.29 4.26*** − 0.01 − 0.16
Indirect effect - model 5 0.06 2.95***
Indirect effect - model 6 0.06 2.85***
model 9, that changes both the measures and the covariates. These re­
sults are always consistent with our original model, suggesting its
robustness.
5. Discussion
This paper focuses on studying how financial literacy helps to reduce
financial constraints and increase technology innovation activities. This
is done from an empirical study using a sample of 310 Spanish SMEs.
The results have provided empirical evidence about the positive effect of
financial literacy on technological innovation of SMEs. The former
favourable effect may be explained partially by the fact that SMEs that
have a greater level of executives’ financial literacy have better access to
credit, inasmuch that greater investments in innovation can be allowed.
These results are relevant because accessing to finance is one of the main
obstacles that SMEs face [125], and our results show managers the need
to develop financial skills within their organization [126]. Accessing to
financial resources allows firms to strategically invest in the exploitation
of physical resources and production factors necessary to develop
technological innovation [5].
5.1. Theoretical contributions
This research makes different contributions to the theory and
research on financial literacy and technological innovation in SMEs. Our
study has implications for the ongoing debate with regards to the an­
tecedents of technological innovation in a SME setting. We prolonged
and defied the current research by analysing an influential factor that
impacts on technological innovation. To the best of our knowledge, this
study is the first to examine the influence of CEO’s financial literacy on
technological innovation. This is specifically intriguing because prior
literature is non-existent regarding the effects of CEO’s financial literacy
and has just begun to analyse how financial literacy affects firm per­
formance [38]. The influence of financial literacy on individuals and
households has been well documented in the literature [22,23], but
financial literacy research at firm level has been practically non-existent.
Secondly, this research proves how CEO’s financial literature alle­
viates financial constraints, and in turn, increases technological inno­
vation, demonstrating that the CEO’s financial literacy–technological
innovation relationship is mediated by the relief of financial constraints.
Thus, SMEs with financially literate CEOs can influence technological
innovation outcomes not only through a direct effect, improving ex­
penses and income management and/or long-term planning, but also
diminishing financial constraints, which has an indirect effect on tech­
nological innovation outcomes. Consequently, the above arguments
suggest that technological innovation of SMEs can benefit from CEO’s
financial literacy doubly: from the positive direct effect but also from the
favourable mediating role of alleviating financial constraints. Finally,
8
Technology in Society 64 (2021) 101519
this study adds to the academic debate with regards to how financial
literacy impact on firm innovation in SMEs, which is still very scant,
extending human capital and upper echelon frameworks.
5.2. Managerial implications
This paper has also some implications for policymakers, economic
Chambers or employers’ associations and practitioners. It reveals the
need for governments and the other institutions and agents to imple­
ment policies addressed to increase the level of CEO’s financial literacy,
which can imply an important impulse for employment generation and
SME growth, through the obtaining of more technological innovation
outcomes. Furthermore, an increase on CEO’s financial literacy should
also be welcomed by financial institutions, which also might enhance
the number and quality of banking operations. Our findings also
encourage firm CEOs to improve their financial literacy since they might
enhance the access to financing and augment technological innovation.
In particular, this study encourages to promote financial education ini­
tiatives that strengthen the relationship between entrepreneurs and the
financial sector [19].
5.3. Limitations and further research avenues
This study has also some limitations. The survey was conducted in
Spain and addressed to SMEs. Therefore, other geographic contexts and
other type of firms might have different features regarding the main
variables analysed in this research. Therefore, future studies should
check the model in other settings to improve the validity of these find­
ings. Likewise, this research uses cross-sectional information and data
may change over time. Future research should utilize longitudinal data
to assess changes over time and to minimize endogeneity issues. More­
over, although the measure used of financial literacy is focused on CEO’s
financial literacy, future studies should also consider the financial lit­
eracy of the firm as a whole, offering a more holistic picture of how
financial literacy performs at all levels of the organization. Furthermore,
further research might provide more evidence on the mechanisms
behind the relationship between financial literacy and innovation. In
this sense, to investigate further its differential impact regarding in­
dustries and other characteristics of the firms, CEOs or Top Management
Teams, leaves room for future research. Finally, future studies should
implement a broader analysis of how financial literacy may alleviate
information asymmetry and, therefore, reduce the impact of adverse
selection problems and moral hazard on creditors decision-making. This
research would allow for further advancement in the theoretical build­
ing that relates financial literacy with financial constraints.
Funding
Data collection was partially supported by both the Spanish Associ­
ation of Accounting and Business Administration (AECA), and the Firm
Feasability Chair at the University of Malaga. The funding sources have
no other involvement or decision in this research.
Avaliability of data
García Pérez de Lema, Domingo; Ruiz-Palomo, Daniel; Diéguez-Soto,
Julio.
(2020), “Data about Financial Literacy, Financial Constraints and
Technological Innovation on SMEs”, Mendeley Data, v1. https://doi.
org/10.17632/prvx2pmxy6.1.
D. García-Pérez-de-Lema et al. Technology in Society 64 (2021) 101519

Table 6
Robustness checks.
Original model Model 7 Model 8 Model 9

Coef. t Coef. t Coef. t Coef. t

Dependent: Alleviate financial constraints

Financial Literacy 0.24*** 3.00 0.24*** 2.86 0.25*** 3.62 0.28*** 3.72
Risk Orientation 0.01 0.06 − 0.01 − 0.08 0.00 − 0.02 − 0.02 − 0.30
Age of the firm − 0.01** − 1.99 − 0.01** − 2.03 − 0.01* − 1.93 − 0.01** − 1.99
Leverage − 0.26 − 1.52 − 0.41** − 2.26 − 0.28 − 1.53 − 0.41** − 2.26
ROA 0.94* 1.89 1.09** 2.10 1.05** 2.09 1.13** 2.17
Gender of CEO − 0.10 − 0.71 − 0.09 − 0.68 − 0.11 − 0.82 − 0.10 − 0.76
Education of CEO − 0.09 − 1.24 − 0.07 − 0.83 − 0.08 − 1.09 − 0.05 − 0.69
NACE code − 0.01*** − 2.83 − 0.01*** − 3.01
manufacturing 0.38*** 2.62 0.40*** 2.79
construction 0.11 0.78 0.12 0.86
commerce 0.59*** 3.60 0.65*** 4.03
Size of the firm 0.00*** 3.38 0.003*** 3.11
micro size firms − 0.20 − 1.26 − 0.17 − 1.09
small size firms − 0.09 − 0.60 − 0.05 − 0.31
Age of the CEO 0.00 − 0.53 − 0.00 − 0.51
CEO Experience 0.00 0.17 0.00 0.25
Acid ratio − 0.02*** − 3.82 − 0.02** − 2.20
Board − 0.10 − 0.93 − 0.11 − 1.05
International − 0.03 − 0.23 0.00 0.03
Family owned 0.00 − 0.01 − 0.11 − 0.49
Family managed − 0.07 − 0.31 0.03 0.15
No. of banks 0.06 1.64 0.06 1.64
R2 0.17 0.22 0.18 0.23

Dependent: Technological innovation

AFC 0.14*** 2.70 0.14*** 2.71 0.13*** 2.66 0.13*** 2.53
Financial Literacy 0.14** 2.20 0.13** 2.04 0.17** 2.57 0.19*** 2.86
Risk Orientation 0.32*** 4.73 0.32*** 4.79 0.32*** 4.50 0.30*** 4.42
Age of the firm 0.00 0.21 0.00 − 0.44 0.00 0.08 − 0.00 − 0.57
Leverage 0.12 1.11 0.19* 1.72 0.11 0.95 0.18 1.58
ROA 0.47 1.25 0.30 0.80 0.51 1.41 0.30 0.84
Gender of CEO 0.01 0.07 − 0.05 − 0.55 0.00 0.04 − 0.06 − 0.60
Education of CEO 0.01 0.11 − 0.01 − 0.27 0.01 0.24 − 0.01 − 0.16
NACE code 0.00 − 1.02 − 0.00 − 1.16
manufacturing 0.15 1.52 0.17 1.59
construction − 0.20* − 1.77 − 0.19* − 1.67
commerce 0.07 0.56 0.11 0.90
Size of the firm 0.00 1.46 0.00 1.07
micro size − 0.09 − 0.78 − 0.07 − 0.58
small size 0.01 0.13 0.05 0.50
Age of the CEO 0.00 0.97 0.00 1.03
CEO Experience 0.00 0.76 0.00 0.87
Acid ratio 0.01* 1.71 0.02*** 2.82
Board 0.12* 1.65 0.11 1.40
International − 0.02 − 0.17 0.01 0.10
Family owned 0.02 0.13 − 0.05 − 0.31
Family managed 0.03 0.22 0.10 0.62
No. of banks − 0.01 − 0.49 − 0.02 − 0.58
R2 0.30 0.34 0.31 0.36

Indiret effects
FL → AFC → TI 0.03** 2.06 0.03** 1.96 0.03** 2.1 0.03** 2.06

Fit indices and model selection criteria

Overall R2/RMSEA 0.969 0.041 0.972 0.035 0.971 0.050 0.975 0.039
CFI/TLI 0.948 0.937 0.932 0.917 0.935 0.919 0.930 0.912
SB-χ2/SRMR 469.38 0.039 643.61 0.039 436.13 0.045 586.99 0.040

Items measuring F. Literacy Original Original Alternative Alternative

Unstandardized coefficients and t-statistic are displayed. Several additional models were tested, applying various combinations of the original items of financial
literacy in groups of four, with consistent results (not reported). *: p < 0.1; **: p < 0.05; ***: p < 0.01.

Code availability of the questionnaire, the sample selection, the analyses of the findings,
the discussion of the results and conclusions. All the authors wrote both
Software application: Stata, v. 14. Statacorp. the original draft and the review and editing of the final manuscript.

Authors contribution statement Declaration of competing interest

D.G. and D.R. conceptualized the present idea. D.G. and J.D. devel­ Not applicable (the authors have no competing interests to declare.)
oped the theory and funding acquisition. D.R. designed the methodology
and performed the computations. All authors participated in the design

9
D. García-Pérez-de-Lema et al.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.techsoc.2020.101519.
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