Inflation, capital structure and firm value

Abstract

How does inflation affect firms’ performance, conditional on their capital structure? To answer this question, we exploit survey-based inflation surprises from the euro area and analyze the cross-section of stock returns for non-financial companies on days of release of inflation data over the period 2020-2022. Our results suggest that, in reaction to a positive inflation surprise, firms with relatively higher leverage experience higher stock returns. Moreover, long-term leverage drives the adjustment, consistently with Fisherian theories, emphasizing the fall in the real value of debt liabilities associated with higher inflation.

Keywords: Inflation, Capital Structure, Leverage, Debt Maturity, Stock Returns, High- Frequency

JEL Classification: E31, E50, G12, G30, G32