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Firm Characteristics, Unanticipated Inflation, and Stock Returns

  • Pearce, Douglas K
  • Roley, V Vance

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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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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  1. Geske, Robert & Roll, Richard, 1983. " The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
  2. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Introduction to "Pensions in the American Economy"," NBER Chapters, in: Pensions in the American Economy, pages 1-19 National Bureau of Economic Research, Inc.
  3. Pesando, James E, 1987. "Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 215-38, April.
  4. Hong, Hai, 1977. "Inflation and the Market Value of the Firm: Theory and Tests," Journal of Finance, American Finance Association, vol. 32(4), pages 1031-48, September.
  5. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Pensions in the American Economy," NBER Books, National Bureau of Economic Research, Inc, number kotl83-1, September.
  6. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1985. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs?," NBER Working Papers 1719, National Bureau of Economic Research, Inc.
  7. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  8. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
  9. Pearce, Douglas K, 1987. "Short-term Inflation Expectations: Evidence from a Monthly Survey: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 388-95, August.
  10. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-24, September.
  11. Nelson, Charles R., 1976. "Recursive structure in U.S. income, prices and output," Proceedings, Federal Reserve Bank of San Francisco, issue 1, pages 2-32.
  12. Douglas K. Pearce & V. Vance Roley, 1984. "Stock Prices and Economic News," NBER Working Papers 1296, National Bureau of Economic Research, Inc.
  13. Jeremy I. Bulow, 1982. "What are Corporate Pension Liabilities?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(3), pages 435-452.
  14. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
  15. Bernard, Victor L., 1986. "Unanticipated inflation and the value of the firm," Journal of Financial Economics, Elsevier, vol. 15(3), pages 285-321, March.
  16. French, Kenneth R & Ruback, Richard S & Schwert, G William, 1983. "Effects of Nominal Contracting on Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 70-96, February.
  17. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  18. Schwert, G William, 1981. "The Adjustment of Stock Prices to Information about Inflation," Journal of Finance, American Finance Association, vol. 36(1), pages 15-29, March.
  19. Gallant, A. Ronald & Jorgenson, Dale W., 1979. "Statistical inference for a system of simultaneous, non-linear, implicit equations in the context of instrumental variable estimation," Journal of Econometrics, Elsevier, vol. 11(2-3), pages 275-302.
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