Susan D. Krische

The Impact of Individual Investors’ Financial Literacy on Assessments of Conflicts of Interest

This research examines how individual investors’ financial literacy impacts their assessments of incentive-based conflicts of interest. Fundamental to many aspects of financial accounting, prior research suggests that less-sophisticated investors may be at a disadvantage in understanding the influence of incentives. I begin by documenting investors’ financial literacy skills using a relatively large sample of participants (n>1,000), benchmarked against national samples of financial capability skills in the United States. With replications of two financial accounting experiments, I then document that investors with higher financial literacy are more sensitive to others’ incentives and more likely to incorporate that understanding into their judgments than are investors with lower financial literacy or non-investors. This research extends the financial literacy literature by considering more detailed, accounting-based financial disclosures, and the accounting literature on the effect of individual cognitive characteristics by assessing conditions under which results from prior research using graduate business students would replicate to a broader range of individual investors.