Market uncertainty and distance to default of non-financial firms in Pakistan

Abstract

The purpose of this study is to provide new facts about the interaction between distance to default (DtD) and the uncertainty for non-financial firms in Pakistan. For this purpose, the study chose the non-financial firms that issued TFCs over the period 2006 to 2018. The data was collected from the financial statements of firms and daily stock prices from the stock market. Three measures of uncertainty, like stock return volatility, stock market volatility, and systematic risk, are used for empirical testing of the hypothesis. A panel data technique is used, which indicates that stock return volatility, stock market volatility, and systematic risk positively affect the DtD of firms listed on the Pakistan Stock Exchange (PSE). The chances of default increase in case of uncertainty in the market. These findings are beneficial for regulators in formulating the measures to ensure the stability of non-financial firms that play a significant role in economic growth.