Effects of Nominal Contracting on Stock Returns
Kenneth
R. French
Tuck School, Dartmouth College, Hanover, NH
and National Bureau of Economic Research
Richard
S. Ruback
Harvard University, Cambridge, MA
and National Bureau of Economic Research
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Political Economy, 91 (February 1983) 70-96
This paper examines the effects of unexpected inflation on the returns
to the common stock of companies with different short-term monetary positions,
different long-term monetary positions, and different amounts of nominal tax
shields. Unlike most previous studies of the effects of nominal contracting,
we distinguish between expected and unexpected inflation in our tests. Surprisingly,
over the 1947-79 period, there is little evidence that stockholders of net
debtor firms benefit from unexpected inflation relative to stockholders of
net debtor firms. We conclude that wealth effects caused by unexpected inflation
are not an important factor in explaining the behavior of stock prices.
Key words: Inflation, Nominal contracting, ARIMA, Tax effects
JEL Classifications: G14, E31
Cited 57 times in the SSCI and SCOPUS through 2020
© Copyright 1983, University of Chicago
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