From Knowledge to Practice: How Financial Literacy Shapes Italian Entrepreneurs’ Adoption of Alternative Finance

This paper investigates whether, and through which channels, entrepreneurs’ financial literacy influences their awareness with and use of alternative finance. Using cross-sectional data from 1,441 Italian microenterprises in the 2021 Bank of Italy survey on financial literacy and digitalization, financial literacy is measured according to the OECD/INFE framework, which combines financial knowledge, behavior, and attitudes into a composite index. Indices of awareness and adoption summarize awareness and use of venture capital, business angels, microcredit, crowdfunding, initial coin offerings, and mezzanine finance. We estimate Tobit and linear models with extensive controls for entrepreneur and firm characteristics and complement our analyses with instrumental-variable Tobit and causal mediation models. Furthermore, we perform an additional analysis repeating the main specification using the BIG3. Results show that higher financial literacy is positively and significantly associated with greater awareness of alternative finance instruments, and all three components of literacy matter. Higher education and exposure to business or personal finance courses further increase awareness. Awareness, in turn, is positively related to actual adoption. Mediation analysis suggests that approximately one-third of the total impact of financial literacy on adoption is mediated through awareness. Instrumental-variable estimates support a causal interpretation for the awareness equation. Overall, financial literacy appears to widen entrepreneurs’ opportunity set, though adoption also depends on firm- and market-specific conditions.