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Firm Characteristics, Unanticipated Inflation, and Stock Returns

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  • Pearce, Douglas K
  • Roley, V Vance

Abstract

This paper reexamines the effects of nominal contracts on the relationship between unantici pated inflation and an individual stock's rate of return. This study differs in three main ways from previous research. First, announced i nflation data are used to examine the effects of unanticipated inflat ion. Second, a different specification is used to obtain more efficie nt estimates. Third, additional nominal contracts are considered. The empirical results indicate that time-varying firm characteristics re lated to inflation predominately determine the effect of unanticipate d inflation on a stock's return. A firm's debt-equity ratio appears t o be particularly important in determining the response. Copyright 1988 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 43 (1988)
Issue (Month): 4 (September)
Pages: 965-81

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Handle: RePEc:bla:jfinan:v:43:y:1988:i:4:p:965-81

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Cited by:
  1. Kwon, Chung S. & Shin, Tai S., 1999. "Cointegration and causality between macroeconomic variables and stock market returns," Global Finance Journal, Elsevier, vol. 10(1), pages 71-81.
  2. Antonio Díaz & Francisco Jareño, 2013. "Inflation news and stock returns: market direction and flow-through ability," Empirical Economics, Springer, vol. 44(2), pages 775-798, April.
  3. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
  4. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
  5. James A. Levinsohn & Jeffrey K. MacKie-Mason, 1989. "A Simple, Consistent Estimator for Disturbance Components in Financial Models," NBER Technical Working Papers 0080, National Bureau of Economic Research, Inc.
  6. Steven A. Sharpe, 1999. "Stock prices, expected returns, and inflation," Finance and Economics Discussion Series 1999-02, Board of Governors of the Federal Reserve System (U.S.).
  7. Reffett, Kevin L., 1995. "Arbitrage pricing and the stochastic inflation tax in a multisector monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(3), pages 569-597, April.
  8. Grant McQueen & V. Vance Roley, 1990. "Stock Prices, News, and Business Conditions," NBER Working Papers 3520, National Bureau of Economic Research, Inc.
  9. John Ammer, 1994. "Inflation, inflation risk, and stock returns," International Finance Discussion Papers 464, Board of Governors of the Federal Reserve System (U.S.).
  10. Lumpkin, Stephen A. & O'Brien, James M., 1997. "Thrift stock returns and portfolio interest rate sensitivity," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 341-357, July.
  11. Ross Jennings & Gustavo Maturana, 2005. "The Usefulness Of Chilean Inflation Accounting," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 8(1), pages 85-118.

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