How Inflation Destroys Value

11 Pages Posted: 12 Feb 2013 Last revised: 12 Oct 2017

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: October 6, 2017

Abstract

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=1125625.

The return on investments depends on the effects of inflation. To analyze the effect of inflation, we shall use a case study of two companies engaging in the same business and in identical market conditions but in two countries with very different inflation rates. The problem of inflation and its consequences is expressed very clearly. And its solution is very simple. When inflation is high, company earnings are artificially high (i.e., not caused by an improvement in the company’s situation), which means that the tax paid is higher than if there was no inflation. Consequently, investments’ real return is smaller.

Keywords: Value, inflation, free cash flow, equity cash flow

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, How Inflation Destroys Value (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=2215796 or http://dx.doi.org/10.2139/ssrn.2215796

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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