The study examines the impact of investor sentiment on external financing of the firms under different macroeconomic conditions by using the sample of 54 firms listed at KSE. For this purpose, equity and debt financing are used as valid measures of external financing. The objectives of the study are to test that how macroeconomic conditions affect the external financing and how external financing responds to changing macroeconomic environment. Moreover, whether these effects vary when they are jointly tested with investor sentiment index. The study uses Fixed Effect Method to fulfill the objectives. The results show that investment is shows a less tendency toward Tobin’s q during economic downturn and more tendency when the economy swings upward. On the cash flow side, firms use more cash flows when economic conditions are unfavorable, and less cash flow when the economic conditions are favorable. The results also show that interest rate and exchange rate negatively impact the external financing in the presence of optimistic investor sentiment, whereas exports and GDP positively impact the external financing in the presence of optimistic investor sentiment. Supervisor:- Dr. Abdul Rashid