The Impact of Advanced Financial Knowledge on Investment Decisions Mediated by Risk Bearing, Risk Composure, and Risk Preference: Evidence from State-Owned Enterprises and Their Subsidiaries in Indonesia

Abstract

This paper investigates the influence of advanced financial knowledge on investment decisions and projects undertaken by State-Owned Enterprises (SOEs) in Indonesia, employing second-order models for variables like risk tolerance (integrating risk preference and risk composure) and risk perception (integrating risk-bearing and risk knowledge) based on prospect theory and behavioral decision theory. Observations from 101 SOEs and their subsidiaries were analyzed using PLS-SEM. The findings reveal that advanced financial knowledge significantly influences investment decisions directly. Furthermore, risk tolerance and perception can mediate the relationship between financial knowledge and investment decisions, with the risk tolerance profile emerging as a more significant mediator. Practical implications suggest that decision-makers exhibiting stronger risk preferences tend to have higher risk tolerance, influencing their investment behaviors. This study introduces a conceptual framework integrating a second-order model where risk tolerance comprises both risk preference and composure, and risk perception includes risk-bearing and risk knowledge, thereby elucidating the relationship between advanced financial knowledge and investment decisions.