Working Paper: NBER ID: w2366
Authors: Douglas K. Pearce; V. Vance Roley
Abstract: This paper re-examines the effects of nominal contracts on the relationship between unanticipated inflation and individual stock's rate of return. This study differs in three main ways from previous research. First, announced inflation data are used to examine the effects of unanticipated inflation. Second, a different specification is used to obtain more efficient estimates. Third, additional nominal contracts are considered. The empirical results indicate that time-varying firm characteristics related to inflation predominately determine the effect of unanticipated inflation on a stock's rate of return. A firm's debt-equity ratio appears to be particularly important in determining the response.
Keywords: Unanticipated Inflation; Stock Returns; Firm Characteristics; Nominal Contracts
JEL Codes: G12; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated inflation (E31) | stock returns (G12) |
| debt-equity ratio (G32) | response of stock returns to unanticipated inflation (G17) |
| higher debt levels (H63) | mitigate adverse effects of inflation on stock returns (G17) |
| depreciation tax shield (H32) | stock returns (G12) |
| unanticipated inflation (E31) | stock's rate of return (G12) |