Unexpected Inflation, Capital Structure and Real Risk-Adjusted Firm Performance
35 Pages Posted: 25 Aug 2014
Date Written: August 25, 2014
Managers can improve real risk-adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk-adjusted returns to unexpected inflation. The Net Asset Value (NAV) of US equity Real Estate Investment Trusts (REITs) serves as a good proxy for nominal assets and accordingly we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real, risk-adjusted performance, and (ii) their inflation hedging qualities are inversely related to deviations from this "matching-nominals" argument. In addition to providing managers with a vehicle to maximise real, risk-adjusted performance, our findings also provide investors with the tools to infer inflation-hedging qualities of equity investments.
Keywords: REITs, leverage, inflation hedging, real risk-adjusted performance
JEL Classification: G00, G31, R30
Suggested Citation: Suggested Citation