ABSTRACT

Over the past few years, Pakistan has faced persistent and ever-changing trade policy uncertainty, creating a state of unpredictability and instability. This study attempts to investigate the effect of trade policy uncertainty on firm risk-taking. To investigate this a trade policy uncertainty index of Pakistan is created to reflect the pattern of uncertainty in trade policies of Pakistan through principal component analysis(PCA). The targeted panel sample of 170 listed exporting firms of PSX is used to investigate the impact of TPU on firm risk-taking over the period of 2012 to 2021. A model selection technique of general to specific model approach is used for analyses. Then the study uses panel techniques of hausman tests, fixed effect, and random effect models for the empirical analysis. The result of the general model suggests that trade policy uncertainty has a negative impact on firm risk-taking. The result of the specific model again proves the negative relationship between trade policy uncertainty and firm risk-taking. Along with these, the influencing mechanism is used to test the effect of financing constraints on the relationship between trade policy uncertainty and firm risk-taking. The finding highlights that the financing constraints of firms increase the negative impact of TPU on firm risk-taking. In the same way, further tests suggest that a firm with a higher debt ratio has a more pronounced impact of TPU on FRT. This study also tests the firm ownership concentration effect on the association of trade policy uncertainty. The result highlights that the ownership concentrations reduce the impact of trade policy uncertainty on firm risk-taking. The results of this study are collinear with the financing constraint theory and risk aversion theory. This study is significant as it highlighted the issues of policy uncertainties and their effect on economic growth. So government should make the policy more certain and long-lasting to avoid the risk associated with it.