Financial socialization and financial distress: The role of cognitive and noncognitive abilities

• Published date: 01 July 2023
• Author: Haidong Zhao,Lini Zhang,Sophia Anong
• Date: 01 July 2023
• DOI: http://doi.org/10.1111/joca.12523

RESEARCH ARTICLE

Financial socialization and financial distress:

The role of cognitive and noncognitive abilities

Haidong Zhao

1

| Lini Zhang

2

| Sophia Anong

3

1

School of Finance and Business,

Shanghai Normal University, Shanghai,

China

2

School of Economics and Management,

Shanghai Institute of Technology,

Shanghai, China

3

Department of Financial Planning,

Housing and Consumer Economics,

University of Georgia, Athens,

Georgia, USA

Correspondence

Lini Zhang, School of Economics and

Management, Shanghai Institute of

Technology, 100 Haiquan Rd, Shanghai

201418, China.

Email: zhang.lini@hotmail.com

Funding information

Humanities and Social Science Fund of

Ministry of Education of China,

Grant/Award Number: 22YJC630202;

Shanghai Sailing Program, Grant/Award

Number: 21YF1446700; Shanghai Pujiang

Program, Grant/Award Number:

21PJC092

Abstract

This study investigated the influence of financial sociali-

zation on financial distress and demonstrated the impor-

tance of both cognitive and noncognitive ability channels

through which this relation operates. Using data from a

nationally representative sample of adult US residents,

the results showed that adults in the bottom quintile of

financial socialization are significantly more likely to

experience financial distress than those in the top quin-

tile. We also provide evidence that financial socialization

is related to financial distress both directly and indirectly

through cognitive ability measures of financial knowledge

and financial skills, as well as the noncognitive ability

measure of financial self-control. The findings highlight

the importance of financial socialization in familial con-

texts. Implications for personal finance advocates, finan-

cial educators, children and family service providers, and

policymakers are discussed.

KEYWORDS

financial distress, financial knowledge, financial self-control,

financial skills, financial socialization

1|INTRODUCTION

Financial socialization is defined as “…the process of acquiring and developing values, attitudes, stan-

dards, norms, knowledge, and behaviors that contribute to the financial viability and individual well-

being”(Danes, 1994, p. 128). Different agents (including parents, peers, school, and media) can

Received: 9 February 2022 Revised: 31 January 2023 Accepted: 2 March 2023

DOI: 10.1111/joca.12523

© 2023 American Council on Consumer Interests.

1236 J Consum Aff. 2023;57:1236–1257.

wileyonlinelibrary.com/journal/joca

promote financial socialization, but parents have been identified as the predominant socialization

agent (Gudmunson & Danes, 2011; LeBaron et al., 2020). Abundant evidence has shown that finan-

cial socialization has significant effects on financial literacy (Deenanath et al., 2019;Sohnetal.,2012),

financial capability (Marchant & Harrison, 2020), financial behavior (Xiao et al., 2011;Zhao&

Zhang, 2020), financial satisfaction (Damian et al., 2020;Xiao&Porto,2017), and financial well-being

(Rea et al., 2019;Shimetal., 2009). In addition, financial socialization's effect applies not only to chil-

dren and emerging adults, but also to people throughout the life cycle (Lanz et al., 2020). However, lit-

tle is known about the role financial socialization plays in consumers' exposure to financial distress.

Financial distress occurs when consumers are financially insecure and have difficulties paying

their mortgages, loans, credit cards, utility bills, rent, and/or medical expenses (Chalise &

Anong, 2017; Parise & Peijnenburg, 2019;Xuetal.,2015). According to TransUnion's prepandemic

data, one-third of individuals in the US had at least one debt in collections and nearly 5% have

declared bankruptcy in the past 7 years (Keys et al., 2020). The economic downturn and accompany-

ing job losses and price increases attributable to the COVID-19 pandemic have exacerbated house-

holds' financial distress further, as nearly 40% of US households reported that they face financial

difficulties in paying utility bills or credit card debt (Calfas, 2021). The previous literature has shown

that financial distress has devastating influences on financial well-being (Leana & Meuris, 2015),

mental and physical health (Drentea & Lavrakas, 2000), and romantic relationship well-being

(Falconier & Jackson, 2020; LeBaron-Black, Saxey, et al., 2021). Therefore, it is crucial to explore

whether financial socialization received in early life alleviates financial distress in adulthood.

Although a growing number of researchers has begun to give special attention to examining

the importance of cognitive and noncognitive abilities to explain financial distress (Kuhnen &

Melzer, 2018; Parise & Peijnenburg, 2019; Zagorsky, 2007), little attention has been paid to investi-

gating the way to improve these abilities to reduce the occurrence of financial distress. This study

filled this literature gap by examining whether financial socialization can alter the probability of

experiencing financial distress directly and indirectly by influencing both cognitive and non-

cognitive ability channels simultaneously. Using data from the 2016 National Financial Well-Being

Survey (NFWBS), we investigated financial socialization's influence on financial distress and quan-

tified the importance of both cognitive and noncognitive ability channels through which this rela-

tion operates. In addition, we explored which channel can be enhanced more effectively to

decrease the probability of experiencing financial distress. Unlike previous research that has

focused primarily on investigating personality traits (Luciano et al., 2004;Parise&

Peijnenburg, 2019;Xuetal.,2015;Xuetal.,2017), which are assumed to be predetermined and

unalterable, we examined financial self-control specifically as a measure of noncognitive ability.

The remainder of this article is organized as follows. Section 2reviews the literature and

develops testable hypotheses. The data, measurement, and descriptive statistics are presented in

Section 3.Section4summarizes the results from baseline analysis and robustness checks. Conclu-

sions and implications are discussed in Section 5, and limitations and suggestions for future

research are offered in Section 6.

2|LITERATURE REVIEW

2.1 |Theoretical framework

The family financial socialization theory that Gudmunson and Danes (2011) developed was

employed as the main theoretical framework for this study. Family financial socialization

ZHAO ET AL.1237