The Association between Firm Risk and Wealth Transfers Due to Inflation

13 Pages Posted: 23 May 2006

See all articles by Michael S. Rozeff

Michael S. Rozeff

SUNY at Buffalo - Department of Financial & Managerial Economics

Abstract

Wealth transfers to and from firms occur during unanticipated inflations, depending on the net monetary position of the firms. Debtor firms gain and creditor firms lose. The observed abnormal returns of the firms depend on whether the beta coefficient impounds the sensitivity to the inflation factor and the extent to which the net monetary position is related to other risk factors associated with beta such as operating and financial leverage. This paper provides two derivations that indicate that the extent of the net debtor position is directly related to operating and financial leverage. This implies that the beta coefficient impounds the risk effects of net monetary position. The evidence of existing studies is shown to be consistent with the modeling implications.

Keywords: beta coefficient, inflation, net debtor, operating leverage, financial leverage

JEL Classification: E3, E31, G1, G12

Suggested Citation

Rozeff, Michael S., The Association between Firm Risk and Wealth Transfers Due to Inflation. Journal of Financial and Quantitative Analysis, June 1977. Available at SSRN: https://ssrn.com/abstract=903513

Michael S. Rozeff (Contact Author)

SUNY at Buffalo - Department of Financial & Managerial Economics ( email )

Buffalo, NY 14260
United States

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