Uncertainty And Leverage-investment Association: An Empirical Analysis Of Firms Listed On Psx
ABSTRACT
This study examines the impact of uncertainty on the leverage-investment relationship in nonfinancial firms listed on the Pakistan Stock Exchange (PSX) from 2011 to 2022. Employing the two-step System Generalized Method of Moments (GMM) technique, the study integrates various measures of uncertainty, such as firm-specific, CAPM-based, and economic policy uncertainty. The findings indicate that uncertainty has a moderating effect on the leverage-investment relationship, with the nature of this impact varying depending on the type of uncertainty and the ownership structure of the firms involved. The robust two-step System-GMM analysis reveals no significant correlation between firm-specific uncertainty and the leverage-investment relationship under the null hypothesis. However, leverage shows a significant impact on investment for Sate Owned Enterprises (SOEs) across all models. Whereas for Non-State Owned Enterprises (Non-SOEs), firm-specific uncertainty intensifies the negative impact of leverage on investment, consistent with the predictions of agency theory, which suggests a tendency toward under-investment in environment of heightened firm-specific risk. The interaction between CAPM-based uncertainty and leverage suggests that this form of uncertainty amplifies the positive effects of leverage on investment for both SOEs and Non-SOEs. This implies that firms with higher leverage are more likely to increase investment in periods of high CAPM-based uncertainty, consistent with the predictions of agency theory of under-investment. Such firms may leverage uncertainty to pursue investment opportunities, reflecting their confidence in navigating market volatility. Additionally, the study highlights that the effect of uncertainty can either exacerbate or mitigate the relationship between leverage and investment, depending on the type of uncertainty and the firm’s ownership structure. SOEs appear to make more investment in face of economic policy uncertainty, potentially due to government backing or long-term strategic objective that are less susceptible to short term policy change. Non-SOEs tend to reduce investment during periods of economic policy uncertainty, likely dived by a lack of government safety nets, heightened sensitivity to market conditions, and the necessity to maintain liquidity and operational flexibility in uncertain environment. The study makes a significant contribution to the existing literature on corporate finance and investment behaviour in emerging markets, particularly in the context of uncertainty. by providing empirical evidence on how different types of uncertainty influence that leverage-investment association, this study deepens our understanding of corporate financial behaviour in volatile environment, offering practical implication for firms operating in similar market conditions.
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