Exploring Impacts of Market Forces and Economic Policy Uncertainty on Investment Behavior: A Case Study of Pakistan

Abstract

This study examines the impact of economic policy uncertainty (EPU) on corporate investment in Pakistani firms, incorporating market competition as a moderating factor. Utilizing a panel regression model with fixed effects, we analyze data from 5,124 firm-year observations. The results reveal a significant negative relationship between EPU and corporate investment, with coefficients of −0.061 and −0.068 in the two regression models, indicating that a 1% increase in EPU leads to a 0.061% and 0.068% decrease in corporate investment, respectively. Furthermore, the interaction term between EPU and the sales-based Herfindahl-Hirschman Index (SHHI) is also significant and negative (-0.036), suggesting that the adverse effects of EPU on investment are more pronounced in highly competitive markets. Our findings are consistent with established economic theories, including the pecking order theory and the trade-off theory of capital structure. Control variables such as return on assets (ROA), leverage (LEVERG), and Tobin’s Q (TOBQ) also demonstrate significant relationships with corporate investment, aligning with existing literature. This study contributes to the literature by providing empirical evidence from a developing country context, highlighting the role of market competition in moderating the effects of policy uncertainty on corporate investment, and validating key economic theories in the Pakistani corporate

sector.