Does financial literacy matter for village-owned enterprises’ (VOEs) performance? Evidence from East Java Indonesia

Abstract

This study offers novelty by estimating the effect of financial literacy on village-owned enterprises’ (VOEs) performance in Indonesia. The data were collected from a survey using a structured questionnaire involving 220 VOEs. The performance was measured from the profit and return on investment (ROI). A two-stage predictor substitution (2SPS) was applied to address the endogeneity issue in estimating the impact of financial literacy on VOE performance. The first stage uses a Tobit regression, and the second stage uses ordinary least squares (OLS). The results of the first stage indicate that VOEs managers’ financial literacy is positively and significantly influenced by education, incentive, number of employees, and training and is negatively influenced by age, marital status, and distance to the capital city. The main finding evaluated in the second stage of 2SPS indicates that financial literacy significantly improves firm performance. However, further estimation based on the sector (agricultural and non-agricultural) shows different results. The impact of financial literacy is more significant for non-agriculture VOEs. The findings imply that financial literacy should be considered in promoting VOEs performance. Therefore, policymakers and organizations should prioritize designing and implementing financial literacy programs for VOEs’ managers. This can be achieved by providing financial-related training for the managers of VOEs.