Executive financial literacy and firm innovation in China

Based on data collected from original surveys on China's small and medium-sized enterprises, this paper examines the relationship between executive financial literacy and firm innovation from both theoretical and empirical perspectives. We design a theoretical model of executive financial literacy and firm innovation. After controlling for individual and firm variables, we find that the executive financial literacy can significantly improve firm innovation. We use an instrumental variable approach to overcome potential endogeneity issues associated with executive financial literacy. We find that the conclusion above is robust and reliable. Executive financial literacy has a more significant impact on firms with low leverage ratios and firms lacking a chairman with experience as a deputy to the People's Congress. The results show that executive financial literacy can promote firm innovation by alleviating financing constraints and improving risk management. The paper provides policy implications for stimulating the innovation and creativity of firms as well as the whole society.