https://orcid.org/0000-0002-1405-9041
Retraction
The PLOS One Editors retract this article [1] because it was identified as one of a series of submissions for which we have concerns about potential manipulation of the publication process, peer review integrity, and authorship. These concerns call into question the validity and provenance of the reported results. We regret that the issues were not identified prior to the article’s publication.
RSM, SMK, YSH, and MW did not agree with the retraction. RTN either did not respond directly or could not be reached.
9 Oct 2025: The PLOS One Editors (2025) Retraction: Moderating role of political stability and economic policy uncertainty between country governance practice and stock market performance. A comparative analysis of Pakistan and Kurdistan Region of Iraq. PLOS ONE 20(10): e0334079. https://doi.org/10.1371/journal.pone.0334079 View retraction
Figures
Abstract
The objective of the study is to explore the relationship between country governance practices along with political stability and Economic policy uncertainty, and stock market performance of two different economies, Pakistan and Kurdistan region of Iraq. To meet our objectives, we used the 25 years past data from 1996 to 2021. Data is collected from the DataStream database. The regression analysis is used as the method of estimation for linear and moderation effect. Our results show that regulatory quality, rules of law and political stability has significant positive relationship with stock market performance of Pakistan, but all the governance indicators have significant positive relationship with stock market performance of the Kurdistan Region of Iraq. Moreover, political stability has significant moderating impact between the governance practices and the performance of the stock markets of both economies indicating that the governance practices perform well with the political stability that leads to rise in the stock market indices of selected countries. Economic policy uncertainty has significant negative moderation impact due to creating the risk in both economies that decrease the performance of the stock markets of the selected economies. Finally, our study advocated some implications for the investors to increase their confidence on the stock of high political stability and low economic policy uncertainty economies. Government can take significant measures to control the uncertainty of the policy and portfolio managers can adjust their risk on the ground of the political stability and efficient governance practices countries.
Citation: Maghdid RS, Kareem SM, Salih Hama Y, Waris M, Naveed RT (2024) RETRACTED: Moderating role of political stability and economic policy uncertainty between country governance practice and stock market performance. A comparative analysis of Pakistan and Kurdistan Region of Iraq. PLoS ONE 19(4): e0301698. https://doi.org/10.1371/journal.pone.0301698
Editor: Evan Poh Hock Lau, Universiti Malaysia Sarawak, MALAYSIA
Received: October 24, 2023; Accepted: March 20, 2024; Published: April 16, 2024
Copyright: © 2024 Maghdid et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
Data Availability: All relevant data are within the manuscript and its Supporting Information file.
Funding: The author(s) received no specific funding for this work.
Competing interests: The authors have declared that no competing interests exist.
1. Introduction
Stock market fluctuation is the main concern around the globe due to the stock market is the barometer of economy. The stock market is affected by different factors such as crisis, pandemics, environmental policies, economic policies and political stability. On the grounds of the getting more significance around the globe, in the range of finance and investing, understanding the dynamics of stock market performance is critical. This study is important in assisting investors, policymakers, and financial institutions in making educated decisions on portfolio management, risk management, and capital allocation. This study can help to more effective investment strategies, economic policy development, and improved risk management by shedding light on the intricate interplay of factors driving stock market behavior, thereby benefiting both individual investors and the broader financial ecosystem.
The relationship between country governance practices and market performance is a complex issue, and it significantly depending on the country and the specific culture related to the governance practices. Governance practices have a significant impact on a country’s economy. The weak governance practices lead to uncertainty, lack of investment, and a decrease or increase in economic growth [1]. Political instability can take many forms, including coups, civil war, and protests. It can lead to a lack of confidence in the government, which in turn can lead to a decrease in investment and economic growth. This can be seen in the stock market, as investors may be hesitant to invest in a country with political instability. Control of corruption also affects the stock market performance. The regulatory quality within the economy may affect the performance of the financial markets.
Moreover, analyzing the relationship between country governance practices and stock market performance is vital for investors and policymakers alike. Effective governance, encompassing political stability, regulatory transparency, and the rule of law, is a key determinant of a country’s economic health. Countries with sound governance practices often attract more foreign and domestic investment, fostering confidence in financial markets. Additionally, governance influences the formulation and consistency of economic policies, directly impacting market dynamics. Understanding this connection enables investors to assess risks, make informed decisions, and navigate volatile market conditions, while policymakers can identify areas for improvement to create an environment conducive to sustainable economic growth and a robust stock market. In essence, examining the nexus between governance and stock market performance provides valuable insights into the broader economic landscape, aiding stakeholders in optimizing their financial strategies and fostering long-term economic stability.
The relationship between political stability and economic policy uncertainty holds paramount importance in influencing financial markets. Political stability serves as a linchpin for financial market confidence, creating an environment where investors feel secure in committing capital for the long term. A stable political climate minimizes the risk of abrupt policy changes, expropriation, or political turmoil, providing a foundation for sustained economic growth and investment. Conversely, economic policy uncertainty can significantly impact financial markets, introducing volatility and complicating decision-making for investors. Clarity and predictability in economic policies are crucial, as uncertainty can lead to hesitancy, market fluctuations, and potential disruptions. As such, the delicate balance between political stability and economic policy certainty is a critical factor in shaping investor sentiment, determining capital flows, and ultimately influencing the overall health and resilience of financial markets.
However, the impact of economic policy uncertainty on stock market performance is an important another research issue because it dives into the complex interaction that exists between government policies and financial markets. Investors, policymakers, and economists must all understand how swings in economic policy uncertainty affect stock prices, trading volumes, and market volatility. This research could help investors make more informed decisions and policymakers design policies that promote market stability and economic growth by providing valuable insights into the extent to which government decisions and policy changes can disrupt or stabilize financial markets.
Pakistan and the Kurdistan Region of Iraq were chosen for a comparative analysis because of their distinct economic, geopolitical, and financial characteristics, which make them compelling cases for studying the moderating role of political stability and economic policy uncertainty between country governance practices and stock market performance. As a South Asian economy with a broad market, Pakistan is subject to the interaction of geopolitical factors, domestic political dynamics, and varying governance styles operations [2]. Meanwhile, the Kurdistan Region of Iraq presents a unique setting, being an autonomous region within Iraq with specific economic policies and geopolitical considerations [3]. Both regions have encountered periods of political instability and economic policy changes, offering a rich landscape to examine how these factors moderate the relationship between governance practices and stock market performance. Additionally, the contrast in their economic structures and geopolitical contexts provides an opportunity to draw insightful comparisons, contributing to a nuanced understanding of the complex dynamics between governance, political stability, economic policies, and financial markets in diverse geopolitical settings.
The two distinct regions belong to emerging economies with different political, economic, and cultural context gain little attention in the previous literature that provides interesting research gap for investigation. Therefore, this study first aim is to investigate the governance mechanism and stock market performance of Pakistan and Kurdistan Region of Iraq. Moreover, we contributed to the previous literature that governance practice in both economies is different due to the economy structure, politics and cultural aspects. Secondly, these two countries faced strong effects of the political instability and the other issue of the governance practices from last decades that create the significant consequences to the neighborhood countries, the discussion of the trend of the governance is very interesting and taking the World governance indicators (WGI) create another gap for research and develop another research objective for the current study. In this regard, our study contributed to the previous literature that effective governance practices along with political stability contribute positive consequences on the stock market’s performance. Moreover, the study also contributed to the existing literature that political stability is necessary with other factors to stabilize and growth of the stock market especially in the emerging economy. The moderating impact of the economic policy uncertainty between corporate governance practices and stock market performance has limited evidence in the previous literature, but this study extracts the gap and contributed that the economic policy uncertainty creates the risk in stock markets and decrease the investors confidence that leads to lower stock market performance. Moreover, the methodological approach through robustness analysis makes more rigor to the study.
Investigating the moderating role in Pakistan and the Kurdistan Region of Iraq is crucial for understanding how political stability and economic policy uncertainty shape the relationship between governance and stock markets, providing insights essential for informed investment decisions and policy formulation in dynamically changing geopolitical and economic landscapes. The comparative analysis enhances the study’s significance by offering a nuanced understanding of the diverse influences on stock market performance in these distinct regions. Therefore, the findings of the study have important implications for investors, policymakers, and businesses. Investors may adjust their investment strategies based on the findings. The weak governance practices related to political instability, rules of law, control of corruption, voice and accountability reduce the investors’ confidence due to high political risk, potentially leading to capital outflows and lower demand for stocks [4]. Policymakers may consider implementing policies to make improvements in governance mechanisms and promote stability in the economy especially in high economic uncertainty. The regulators and government make measures to reduce corruption, improve governance, and enhance political stability, all of which could contribute to better stock market performance. Businesses may adjust their strategies based on the findings [5].
With the wide range of its scope, this study provides new insight on the country governance, stock market performance, political stability and economic policy uncertainty. Moreover, two distinctive economy is selected as sample on the ground of different culture, political structure and economic condition. This study covers the country governance measures such as voice and accountability, rules of law, regulatory quality, effective government policies, political stability and control of corruption. Similarly, the economic policy uncertainty is also included in the study for evaluating provides the guidelines for the investors and other stakeholders. Moreover, the comprehensive analysis by including wide range of data from both developed and emerging economy stock markets and governance create the limitation and provide the future research suggestion.
The rest of the article is organized as follows: Section 2 provides a thorough overview of contemporary research and theoretical underpinnings, as well as the introduction of different hypotheses for testing, all with the goal of throwing light on the variables. Section 3 provides an overview of the conceptual framework, research design, and methods. Section 4 presents the study’s findings, while Section 5 includes the conclusion, future research proposals, limitation, and practical implications.
2. Theoretical and empirical literature review
The economic theories such as the rational expectations theory, portfolio theory, agency theory, and efficient market hypothesis, provide insights into how country governance related to political unrest, regulatory quality, rules of law and others impact stock market performance. The rational expectations theory suggests that stock market investors base their decisions on rational expectations of future events. Weak governance practices create uncertainty and increase the perceived risk of investing, leading to cautious decision-making by investors and a decline in stock market performance [5]. The eventuality about the outcome of political events, such as elections or government changes, impact investors’ expectations about future economic conditions and corporate earnings, leading to changes in stock prices and overall stock market performance.
The portfolio theory suggests that investors hold a diversified portfolio of stocks to minimize risk. However, uncertainty of the governance and economic indicators increase the overall risk of investing in a particular country or region, leading to a decrease in demand for stocks from that area and a decline in stock market performance [6]. Investors may become more risk-averse during times of political instability and weak regulatory quality, which leads to reduced demand for stocks and a subsequent decrease in stock prices [6].
The agency theory suggests that investors are concerned with the actions of management and government officials who can impact a company’s financial performance. Uncertainty led to changes in government policies, regulations, and leadership, which can negatively impact companies’ financial performance and reduce stock market returns [4]. Moreover, [4] also suggested that Investors may become concerned about the stability and predictability of the business environment during times of political instability, leading to a decline in stock market performance.
The efficient market hypothesis suggests that financial markets are efficient and reflect all available information. However, political instability creates uncertainty and information asymmetry, leading to market inefficiencies and a decline in stock market performance. For example, political events may trigger emotional responses among investors, leading to market reactions that may not be fully rational [2]. This can result in deviations from market efficiency and impact stock prices.
Moreover, these economic theories provide insights into how political instability and economic uncertainty impact stock market performance via the governance practices through various channels, including uncertainty, risk, expectations formation, and market efficiency. Uncertainty reducing demand for stocks, impacting companies’ financial performance, creating risk and information asymmetry, and influencing investors’ decision-making behavior. However, it’s important to note that the moderation of political stability and economic policy uncertainty with stock market performance is complex and it is influenced by other factors as well. Further research is needed to better understand the dynamics of this relationship and its implications for financial markets.
There are several studies that justify the relationship between governance indicator of the country and its stock market performance. The regulatory framework embedded within the economy serves as the structural underpinning for business entities, facilitating their operations and various undertakings. Empirical and theoretical literature abounds with substantial evidence elucidating the intricate relationship between regulatory quality and stock market performance across diverse economies. In the study by [7], it was revealed that regulatory quality had an adverse impact on the stock market, as indicated by various markers, including renewable energy sources, among others. Different sectors are affiliated with distinct business activities, yet stringent regulations governing these activities often result in diminished business operations, stemming from both local and international regulatory constraints. Conversely, [8] identified a positive correlation between regulatory quality and stock market prices, underscoring the pivotal role effective regulation plays in ensuring a harmonious flow of economic resources, subsequently fostering business growth and augmenting stock market returns. Therefore, previous literature has the gap in the literature that the regulatory quality effect the stock markets with different ways. On the ground of the previous evidence in literature, we developed the following Hypothesis related to regulatory quality.
- H1: There is positive relationship between regulatory quality and stock market performance of Pakistan and Kurdistan region of Iraq.
Numerous scholars have probed the multifaceted effects of regulatory quality on various facets of stock market operation and performance, offering valuable insights into the imperative nature of sound regulation [9]. Further research by [10] has substantiated that diminished levels of “voice and accountability” exert a detrimental influence on stock market development, investor confidence, and market integrity. In countries where civic participation is limited and government accountability wanes, investor trust may be undermined, leading to suboptimal stock market performance, as demonstrated by [11]. Moreover, the free economy without any collapse make more improvement in the stock market [12]. Corruption has garnered substantial scrutiny with respect to its repercussions on stock market performance, and prior research has conducted an exhaustive exploration of this interconnection. Corruption can inflict damage across various dimensions of stock market operations and results, as underscored by investigations [13]. Therefore, there is gap in the existing literature related to the relationship between control of corruption and voice accountability, and stock market performance in selected regions are found. Moreover, on the ground of the previous literature, we developed the following hypothesis.
- H2: There is positive relationship between Control of Corruption and stock market performance of Pakistan and Kurdistan region of Iraq.
- H3: There is positive relationship between Voice and accountability and stock market performance of Pakistan and Kurdistan region of Iraq.
Prior research has homed in on the ramifications of efficacious government policies on the stock market. Scholars have delved into the ways in which diverse government policies shape the outcomes of stock markets, shedding light on the pivotal role of robust policy frameworks in fostering a well-operating stock market. A multitude of studies, exemplified by the work of [14], have unearthed a nexus between sound government policies and stock market performance. The findings of [15] underscored that countries characterized by proactive and supportive government policies tend to yield stock markets that are more substantial, liquid, and operationally efficient. Therefore, the underlying studies provides the gap for further investigation. On the grounds of the previous empirical and theoretical literature, we developed the following hypothesis.
- H4: There is positive relationship between Government effectiveness and stock market performance of Pakistan and Kurdistan region of Iraq.
- H5: Rules of law has significant positive impact on the stock market performance of Pakistan and Kurdistan region of Iraq.
There have been several studies that have examined the impact of political instability on the economy through the use of MSCI index values. [16] found that political instability in emerging markets has a significant negative impact on stock market performance as measured by the MSCI Emerging Markets Index. Moreover, every economy show different behavior at different time domain [17, 18]. found that political instability in emerging markets has a significant negative impact on the performance of the MSCI Emerging Markets Index. The study found that political instability was negatively correlated with MSCI index values, and again that this relationship was stronger in more developed countries. The study also found that political instability had a greater negative impact on the MSCI Emerging Markets Index than on the MSCI World Index. [19] found that political instability in emerging markets has a significant negative impact on the performance of the MSCI Emerging Markets Index. Therefore, from the previous literature, we extract that the political stability may moderating impact between the governance practices and the stock market performance on the ground of the political instability is the significant problem especially in the merging and underdeveloped countries. On the grounds of the previous literature, we developed the following hypothesis related to political stability.
- H6: There is positive relationship between Political stability and stock market performance of Pakistan and Kurdistan region of Iraq.
- H7: Political stability has significant moderating impact between governance practices and stock market performance in two distinctive regions.
Economic policy uncertainty indeed exert a negative impact on stock market performance [20]. When there is a lack of clarity and stability in economic policies, investors often become more risk-averse, leading to increased market volatility and reduced stock prices [20]. Uncertainty surrounding policies related to taxation, trade, fiscal stimulus, or regulatory changes can make it challenging for businesses to plan and make strategic decisions. In such an environment, investors may hesitate to commit capital, which can result in lower stock prices and subdued market activity. Moreover, heightened economic policy uncertainty can undermine consumer and investor confidence, which further dampens economic growth and, consequently, stock market performance. Therefore, the previous literature has the gap related to the moderating impact of the economic policy uncertainty for further investigation in two regions study. It’s essential for policymakers to provide clear, consistent, and stable economic policies to mitigate these adverse effects and promote a more favorable stock market environment. Moreover, investors want to manage their risk [21]. On the ground of the previous literature, we developed the following hypothesis,
- H8: Economic policy uncertainty has a significant negative impact on the stock market performance.
- H9: Economic policy uncertainty has significant moderating impact between governance practices and stock market performance in two distinctive regions.
3. Research design
This study covers two region Pakistan and Kurdistan in which peoples of the economy faced the many distresses period due to the economic, social and cultural aspect. To meet our objectives of the study, we used the 25 years quantitative based secondary data from 1996 to 2021 on an annual basis. From all emerging economies, the reason for the selection of both economies on the ground of the rapid change in their politics regime. Another reason Both Pakistan and Iraq have experienced significant political and social challenges, such as conflicts, which could make them relevant choices for a study on conflict resolution, security, or post-conflict reconstruction. The data of the MSCI indices of these two economies are collected from the DataStream database. The WGI indicators data is collected from the world bank data portal (https://info.worldbank.org/governance/wgi/). Moreover, the data of the economic policy uncertainty are collected from the database (https://www.policyuncertainty.com/). The Conceptual model developed on the basis of the previous theory and literature are given in Fig 1.
Table 1 shows the Variables operational definitions and measurement. Moreover, Econometric model of the study that used for the linear analysis are given below,
The econometric model for the moderating effect of the political stability between country governance mechanism and the stock market performance of both country Pakistan and Kurdistan region of Iraq are given below,
The econometric model for the moderating effect of the Economic policy Uncertainty between country governance mechanism and the stock market performance of both country Pakistan and Kurdistan Region are given below,
The Ordinary Least Squares (OLS) method is a frequently used statistical strategy in business analysis, used to assess the relationship between a dependent variable and one or more independent variables. OLS is frequently used in regression analysis to determine both the magnitude and direction of the associations between variables [20]. In another study used OLS regression analysis to examine the relationship between ethical leadership and employee well-being [23]. Furthermore, the OLS method has found widespread application in business analysis, where it is critical in evaluating varied linkages and providing valuable insights for decision-making. Its versatility and user-friendliness have made it a popular technique used by both researchers and practitioners. Furthermore, regression analysis is a powerful tool for analyzing data, allowing predictions and predicting of future patterns. Numerous studies have demonstrated the utility of regression analysis in a variety of sectors, including finance, economics, and medical. For example, a recent study investigated the relationship between economic growth and foreign direct investment (FDI) in the ASEAN region. The researchers used multiple regression analysis to analyze the data [24].
Another used regression analysis to examine the relationship between stock market returns and exchange rates in China ([25]. In the field of medicine, a study used regression analysis to analyze data on patient satisfaction with healthcare services [26]. These studies demonstrate the usefulness of regression analysis in diagnosing the relationship between two or more variables in a range of fields. It allows researchers to identify significant relationships and make informed decisions based on data-driven insights. This study utilizes quantitative methodology, analyzing time-series data on a key economic indicator, namely the Stock Market. Moreover, the research employs a descriptive study approach to investigate the impact of different governance indicators effects in the Kurdistan Region of Iraq (KRI) and Pakistan on the economy and the mechanisms through which such instability affects economic outcomes. To carry out this investigation, the study draws on data from the MSCI index and the WGI indicators for the KRI and Pakistan.
4. Empirical findings and discussion
Table 2 signifies descriptive statistics for our study for the data of Pakistan. Control of corruption has means value of -0.93 that indicating the week governance towards corruption control by the Government of Pakistan. Government effectives has the mean value of -0.781 that also indicating the week performance of the Pakistan towards government effective policies. The MSCI index has an average of 2.333. Pakistan has average score of the political stability of -2.190 that indicating the week performance and Rules of law has means value of -0.919 and Regulatory quality has also mean value in negative that indicate the week governance within Pakistan. Voice and accountability have a mean value is -0.861 that also indicates the week performance towards the voice and accountability score. Moreover, Iraq all the Governance indicators has mean value in negative that shows the week performance towards control of corruption, government effective policy making, rules of law and other. Control of corruption has a mean value -1.38 and Government effectiveness has mean value -1.4190. Political stability has -2.28 and regulatory quality has also -1.35 respectively.
Table 3 shows the correlation matrix of the data of Pakistan and Kurdistan (Iraq), all variables correlation value is less than 0.80, indicating the low correlation existed between them and fit for the analysis. The criterion of the high correlation is 0.80, if any value of the correlation between two variables is greater than this criterion then we should remove the correlation through different methods then we run the analysis.
Results and findings
In our regression analysis that shown in Table 4 related to Pakistan, Government effectiveness has not significant relationship due to cultural differences across the country. In Pakistan Political stability, rules of law and voice and accountability has significant at 1% level of the significance that indicate the increase in these indicators lead to rise the stock market index of Pakistan stock exchange.
In our results related to the KRI in Table 4, all the World governance indicators has significant at 1%, 5%, and 10% levels and has positive impact on the stock market performance, indicating that when there is the good governance mechanism within the economy including the political stability then there is positive impact on the indices. When all indicators improved then Stock market indices of the Iraq improved.
Table 5 represents the moderating impact of political stability to enhance the relationship between country governance practices and the stock market performance. Our findings shows that the political stability has significant positive moderating impact between Pakistan and KRI governance practices and their stock market performance. It means that the control of corruption with political stability promotes the financial market that leads to the growth of the financial market. When a country effectively manages corruption and fosters a stable political environment, it instills confidence in investors, both domestic and foreign, by ensuring a level playing field and protection of their rights. Such conditions also enable greater transparency, bolster the rule of law, and encourage long-term investment. As a result, these critical factors attract capital, stimulate economic growth, and facilitate the development of a vibrant and robust financial market that plays a fundamental role in channeling resources, facilitating economic expansion, and creating opportunities for businesses and individuals, ultimately contributing to broader economic prosperity. Therefore our findings are justified with the findings of the [27].
Moreover, our findings shows that the government effectiveness with political stability increase the stock market indices of Pakistan and KRI. It means that a government that efficiently executes its policies and regulations provides a conducive environment for businesses, which in turn attracts both domestic and foreign investments. This heightened investor confidence, coupled with political stability, reduces uncertainty and risk in the market. As a result, stock market indices tend to rise as businesses thrive, the rule of law is upheld, and economic growth ensues. Political stability further encourages long-term investment strategies, contributing to the upward trajectory of stock market indices. In essence, a well-functioning government and political stability are crucial factors that can instill trust, attract capital, and foster growth in stock markets, reflecting the overall health and optimism in the national economy. In this way, our findings are similar with the findings of the [28].
Our findings shows that the regulatory quality with political stability increase the stock market indices of Pakistan and Kurdistan region of Iraq. In Pakistan, a regulatory framework that promotes transparency, investor protection, and fair market practices, when coupled with political stability, can attract local and foreign investors. It enhances trust and confidence in the market, leading to increased capital inflow and improved stock market performance. Similarly, in the Kurdistan region of Iraq, where political stability has been historically tenuous due to regional conflicts, a robust regulatory environment can mitigate some of the associated risks and help attract investment. By upholding transparency and the rule of law, regulatory quality complements political stability, fostering economic growth and encouraging long-term investments. In both regions, the convergence of regulatory quality and political stability is instrumental in elevating stock market indices, reflecting a positive outlook for investors and the overall economic environment. Similarly, our findings are justified with the previous findings of the [29].
Similarly, our findings show that the rules of law and voice and accountability with political stability increase the stock market. A strong rule of law ensures that contracts are enforced, property rights are protected, and disputes are resolved impartially, providing a dependable foundation for investment. Voice and accountability mechanisms enable citizens to participate in the decision-making process and hold their government accountable, leading to stable governance and more predictable economic policies. Political stability complements these factors by reducing uncertainty and risk for investors. When these elements work in synergy, they build investor confidence, encourage capital inflow, and create an environment conducive to sustainable economic growth, all of which ultimately contributes to the growth and prosperity of the stock market. Similarly, [30] also find the similar results that justify our findings with solid reason.
Table 6 shows the findings of the moderating impact of the economic policy uncertainty that leads to decrease the stock market performance of both selected countries. It means that Corruption control is essential for a functioning stock market because it develops investor confidence and maintains a level playing field. However, when combined with considerable economic policy uncertainty, it might have a negative impact on stock market performance. Uncertainty in economic policy, such as abrupt and unforeseen changes in rules or fiscal policies, generates an atmosphere of instability and risk for investors. Therefore, our findings are justified through the findings of [31]. Even in a low-corruption environment, economic policy uncertainty can discourage investment and distort market dynamics. Investors may become reluctant, and corporations may postpone financial decisions, both of which can have a negative impact on stock market performance [32]. To create the conditions for a healthy stock market, reducing corruption must be accompanied by stable and transparent economic policies.
Moreover, our results show that the Government effectiveness, rules of law and regulatory quality with economic policy uncertainty decrease the stock market performance. It indicates that Effective governance, legal frameworks, and quality regulations support investor confidence and provide a predictable market environment. Economic policy uncertainty, as manifested by abrupt changes in fiscal or regulatory policies, adds a degree of risk and unpredictability. Investors are more cautious, and corporations may postpone investments and financial choices, lowering stock market performance. The tension between robust institutional foundations and economic policy uncertainty can erode trust and upset market dynamics, highlighting the importance of consistent and transparent economic policies to support a thriving stock market.
5. Summary and conclusions
This study examines the relationship between the country governance practices and the stock market performance of the Pakistan and Iraq. Moreover, this study also investigated the moderating impact of political stability and economic policy uncertainty. Our study finds the positive impact of the governance indicators on the stock market performance, but its relationship varies across the country as we can see in our analysis related to Pakistan and Kurdistan region of Iraq. The effect of the governance indicators is different in both countries with similar directions that shows the cultural and governance variance across the nations. From our findings of the regression without moderation, we concluded that the disparities in socioeconomic, cultural, and institutional circumstances, governance methods have diverse effects across countries. The efficiency of governance measures can be influenced by a country’s history, economic development, and institutional maturity. Furthermore, cultural norms, political institutions, and social dynamics all influence how governance methods are viewed and implemented, as well as their impact on economic and social results. As a result of these contextual differences, what may be good governance techniques in one country may not deliver the same outcomes in another.
Moreover, our study shows that political stability is the dominant factor that increase the effect of the governance mechanism. From our findings we concluded that in a politically stable environment, governance measures can be consistently implemented and enforced, ensuring that they have a more significant impact on economic and social outcomes. Stability also fosters confidence among investors and the general population, facilitating the acceptance and adherence to governance principles, which in turn promotes their overall success. Additionally, political stability often leads to more predictable policymaking, aligning governance practices with long-term objectives and thus magnifying their positive effects on a country’s development.
However, the economic policy uncertainty creates the risk for the investors that lead to decrease the stock market indices. Our findings show that the governance indicators become weak with the economic policy uncertainty. We conclude that the Governance indicators tend to weaken when economic policy uncertainty is high. Elevated economic policy uncertainty can disrupt the consistent implementation of governance measures, leading to inconsistent enforcement and diminishing their overall effectiveness. Additionally, such uncertainty can erode investor confidence and trust in governance institutions, making it harder to achieve their intended goals. In this context, maintaining stable and predictable economic policies is essential to support and strengthen governance indicators.
The findings of the study have important implications for investors, policymakers, and businesses. Investors may adjust their investment strategies based on the findings. The weak governance practices related to political instability, rules of law, control of corruption, voice and accountability reduce the investors’ confidence due to high political risk, potentially leading to capital outflows and lower demand for stocks (Koepke, 2019). Policymakers may consider implementing policies to make improvements in governance mechanisms and promote stability in the economy especially in high economic uncertainty. The regulators and government make measures to reduce corruption, improve governance, and enhance political stability, all of which could contribute to better stock market performance. Businesses may adjust their strategies based on the findings. Moreover, the government can control the economic policy uncertainty by timely making decision and its implementations.
Due to the limitations some economic indicators such as GDP, foreign investment, and the fiscal policy determinants are not taken into account. Therefore, future research may be conducted on these indicators to assess the relation with stock market performance. Moreover, in this study only two economies selected due to data limitations, but future research may be conducted on the Asian as well as other developed economies across different regions. The stock market volatility due to different crises and pandemics should be investigated related to stock market performance in future research.
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