The Economic Fog: How Policy Uncertainty Shapes Firm Performance in Pakistan

Abstract

This study examines the influence of economic policy uncertainty on corporate performance in Pakistan, utilizing a news-based uncertainty index in conjunction with firm-level data. The results demonstrate that increased policy-related uncertainty relates with reductions in corporate investment, employment, and revenue production. This adverse effect seems to be less significant among state-owned firms, perhaps due to their robust institutional connections and availability to governmental assistance. The paper investigates essential transmission mechanisms to elucidate the underlying dynamics, revealing that uncertainty constrains corporate activity by reducing risk-taking, augmenting precautionary cash reserves, and altering the tax burden. These reactions demonstrate companies' attempts to protect themselves from volatile policy landscapes. This article highlights internal adjustment strategies, providing significant implications for Pakistani policymakers aiming to promote private sector growth and economic stability amidst persistent policy volatility.

Key Words: Cash holdings, Economic Policy Uncertainty, Firm Performance, Pakistan Stock Exchange,
Risk-Taking, State-Owned Enterprises, Tax Burden