Impact of Macroeconomic Determinants on Stock Prices of Shariah Compliance Firms and the Moderating Role of Political Instability: Evidence from Pakistan

Abstract

This is evidenced to the fact that macroeconomic determinants are very crucial in share prices and the overall performance of the stock market. Thus, this paper examined the macroeconomic variables and their impact on the stock market performance in Pakistan and in particular, Shariah-compliant companies during the years 2014-2023. The study analyzes how interest rate, inflation, money supply, and gross domestic product (GDP) have a direct impact on stock prices using panel data regression methods, descriptive statistics, fixed effects model, and interaction term analysis to also determine the moderating nature of political instability. The variables that are included are firm-level variables profitability, firm size, and dividend payout ratio as well as a COVID-19 dummy variable to adjust to the disruption during the pandemic. The results indicate that money supply has a positive and significant effect on the stock prices which represents liquidity-based investor optimism. Conversely, the conventional economic theory holds true since inflation and interest rates have a negative impact on stock performance. Whereas the GDP does not show a substantial direct impact, the interplay between the two creates negative results with political instability. The impact of political instability heavily mediates stock price relationships in the macroeconomic as it helps to reduce the positive influences of money supply and GDP as well as exacerbates the negative influences of inflation and interest rates. On the firm level, profitability and dividend payout ratio have a positive relation with stock prices, but firm size does not have a significant effect. The COVID-19 factor demonstrates the mixed significance, which implies the adaptive market dynamics. The paper has highlighted the importance of political stability in influencing the success of the macroeconomic policy and investor confidence. The results have significant implications to investors, policymakers, and financial analysts who can work in politically unstable emerging markets.

Keywords

Stock Prices, GDP, Inflation, Interest Rate, Money Supply.