The Role of Locus of Control as a Mediator in the Impact of Financial Literacy and Income on Investment Decisions of Small and Medium Enterprises (SMEs)

Abstract

This study aims to investigate the mediating role of locus of control in the relationship between financial literacy, income, and investment decisions among Small and Medium Enterprises (SMEs) in Malang City, a region known for its dynamic growth in the fashion sector. Employing a quantitative descriptive approach with Partial Least Squares-Structural Equation Modelling (PLS-SEM), the research analyzes data from 120 SME owners selected through proportional random sampling. The findings reveal that both financial literacy and income have a positive influence on locus of control, which in turn significantly impacts investment decisions. Moreover, locus of control is shown to mediate the effect of financial literacy and income on investment decisions. This research contributes to behavioural finance literature by highlighting the pivotal role of psychological factors, such as locus of control, in shaping financial decision-making within SMEs. Practically, these results suggest that SME associations and policymakers should prioritize financial education and self-control development programs to enhance investment decisions. By doing so, they can foster better economic outcomes for SMEs in the region.