Abstract
This paper examines the cross-sectional effect of inflation on the investment and employment decisions. The paper shows that more heavily capitalized firms tend to have a greater reduction in the capital-labor ratio during an inflationary period. The paper also shows that firms with a higher cost of debt to wage ratios and a larger amount of depreciation shelter tend to use more labor in the inflationary period. Empirical results are generally consistent with these arguments.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Auerbach, A.J., “Inflation and the Choice of Asset Life.”Journal of Political Economy 87, 621–638, (1979).
Bernard, V.L., “Unanticipated Inflation and the Value of the Firm.”Journal of Financial Economics 15, 285–321, (1986).
Brenner, M. and Venezia, I., “The Effects of Inflation and Taxes on Growth Investments and Replacement Policies.”Journal of Finance 39, 1519–1528, (1983).
Chen, A.H. and Boness, A.J., “Effects of Uncertain Inflation on the Investment and Financing Decisions of a Firm.”Journal of Finance 30, 469–483, (1975).
Dickey, D.A. and Fuller, W.A., “Distribution for the Estimators for Autoregressive Time Series with a Unit Root.”Journal of the American Statistical Association 74, 427–431, (1979).
Fama, E.F.,Foundations of Finance. New York: Basic Books, 1976.
Fama, E.F., “Stock Returns, Real Activity, Inflation, and Money.”American Economic Review 71, 545–565, (1981).
Fama, E.F. and Schwert, G.W., “Asset Returns and Inflation.”Journal of Financial Economics 6, 115–146, (1977).
Feldstein, M., “Inflation, Tax Rules and Investment: Some Econometric Evidence.”Econometrica 50, 825–862 (1982).
Feldstein, M., Green, J. and Sheshinski, E., “Inflation and Taxes in a Growing Economy with Debt and Equity Finance.”Journal of Political Economy 86, 553–570, (1978).
French, K.R., Ruback, R.S. and Schwert, G.W., “Effects of Nominal Contracting on Stock Returns.”Journal of Political Economy 91, 70–96, (1983).
Geske, R. and Roll, R., “The Fiscal and Monetary Linkage between Stock Returns and Inflation.”Journal of Finance 38, 1–33, (1983).
Gonedes, N.J., “Evidence of the ‘Tax Effects’ of Inflation Under Historical Cost Accounting Methods.”Journal of Business 54, 227–270, (1981).
Gordon, R.J., “Why U.S. Wage and Employment Behavior Differs from that in Britain and Japan.”Economic Journal 92, 13–44, (1982).
Greenberg, E., Marshall, W. and Yawitz, J., “The Technology of Risk and Return.”American Economic Review 68, 241–251, (1978).
Healy, P. and Palepu, K., “Earnings Information Conveyed by Dividend Initiations and Omissions.”Journal of Financial Economics 21, 149–175, (1988).
Hong, H., “Inflation and the Market Value of the Firm: Theory and Tests.”Journal of Finance 32, 1031–1048, (1977).
Judge, G.G., Hill, R.C., Griffith, W.E. and Lee, T.C.,Introduction to the Theory and Practice of Econometrics. New York: John Wiley and Sons, 1982.
Kim, M., “Inflation Effects in the Capital Investment Process: An Empirical Examination.”Journal of Finance 34, 941–950 (1979).
Nelson, R., “Inflation and Capital Budgeting.”Journal of Finance 31, 923–931, (1976).
Nelson, C.R. and Kang, H., “Pitfalls in the Use of Time as an Explanatory Variable in Regression.”Journal of Business and Economic Statistics 2, 73–82, (1984).
Pearce, D.K. and Roley, V.V., “Firm Chracteristics, Unanticipated Inflation and Stock Returns.”Journal of Finance 43, 965–981, (1988).
Pennacchi, George G., “Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data.”Review of Financial Studies 4, 53–86, (1991).
Pindyck, R.S., “Risk, Inflation, and the Stock Market.”American Economic Review 74, 335–351, (1984).
Summers, L.H., “The Non-Adjustment of Nominal Interest Rates: A Study of the Fisher Effect.” in J. Tobin, ed.,Macroeconomics, Prices, and Quantities. Washington, D.C.: The Brookings Institution, 1983.
Taylor, J.B., “Union Wage Settlements During a Disinflation.”American Economic Review 73, 981–993, (1983).
Tsay, R.S. and Tiao, G.C., “Consistent Estimates of Autoregressive Parameter and Extended Sample Autocorrelation Function for Stationary and nonstationary ARIMA Model.”Journal of the American Statistical Association 79, 84–96, (1984).
Author information
Authors and Affiliations
Additional information
The authors wish to thank John Anderson, Jim Hodder, two anonymous referees and Cheng F. Lee, the Editor for their helpful comments. All remaining errors are ours.
Rights and permissions
About this article
Cite this article
Kim, M.K., Wu, C. The cross-sectional effect of inflation on corporate investment and employment. Rev Quant Finan Acc 3, 203–220 (1993). https://doi.org/10.1007/BF02407006
Issue Date:
DOI: https://doi.org/10.1007/BF02407006