The Effects of Hyper-Inflation on Accounting Ratios: Financing Corporate Growth in Industrial Economies

International Finance Corporation, Department of Economics Working Paper No. 3

Posted: 17 Oct 1999

See all articles by Geoffrey Whittington

Geoffrey Whittington

University of Cambridge - Faculty of Economics and Politics

Victoria Saporta

Bank of England

Ajit Singh

United Nations; University of Cambridge

Abstract

Hyper-inflation can have a severe distortionary effect on the pattern of corporate finance which is apparent from company accounts. A simple algorithm, based upon the method of inflation accounting applied in Brazil, is developed and applied to the accounts of Turkish listed companies for the period 1982-90. The adjusted figures give a more plausible picture of corporate profitability and growth, and this suggests that the adjustment method is substantially successful. The financing patterns emerging from the adjusted data support the proposition of Singh and Hamid (1992) and Singh (1995) that (a)the corporate sector in developing countries tends to rely more on external finance than on internal finance for growth and (b), among the external sources of funds, it uses new share issues to a surprisingly high degree. Further adjustments to the measurement of the external finance variable for Turkey and other countries also support this proposition. This contradicts the "pecking order" hypothesis, which suggests that retained profits are the preferred source of finance, and also runs contrary to the belief that the capital markets of developing countries are inadequate to support substantial corporate growth by external financing, including equity financing.

JEL Classification: G31, G32

Suggested Citation

Whittington, Geoffrey and Saporta, Victoria and Singh, Ajit, The Effects of Hyper-Inflation on Accounting Ratios: Financing Corporate Growth in Industrial Economies. International Finance Corporation, Department of Economics Working Paper No. 3, Available at SSRN: https://ssrn.com/abstract=179350

Geoffrey Whittington

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
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Cambridge, CB3 9DD
United Kingdom
+44 122 333 5200 (Phone)
+44 122 333 5475 (Fax)

Victoria Saporta

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ajit Singh (Contact Author)

United Nations ( email )

New York, NY 10017
United States

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+ 44 1223 350434 (Phone)
+ 44 1223 740479 (Fax)

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