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Inflation, Leverage and Stock Returns

Author

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  • D'Andrea, Angelo
  • Fabiani, Andrea
  • Piersanti, Fabio Massimo
  • Segura, Anatoli

Abstract

We show that inflation affects stock returns through a long-term leverage channel. Using a high-frequency identification strategy, we analyze stock returns in response to inflation surprises for non-financial firms in the U.S. and the Euro Area from 2020 to 2022. We rely both on survey-based and market-based measures of inflation surprises. We find that firms with higher leverage experience larger stock returns following positive inflation surprises, and this is driven by long-term debt. The effect is stronger in countries with inefficient corporate debt resolution. Our findings align with a Fisherian mechanism, where inflation reduces the real value of long-term debt.

Suggested Citation

  • D'Andrea, Angelo & Fabiani, Andrea & Piersanti, Fabio Massimo & Segura, Anatoli, 2025. "Inflation, Leverage and Stock Returns," CEPR Discussion Papers 19966, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19966
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    File URL: https://cepr.org/publications/DP19966
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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