Accounting and the Macroeconomy: The Case of Aggregate Price-Level Effects on Individual Stocks

Abstract

The author used financial statement analysis to examine systematic stock-valuation effects of aggregate price-level changes on individual companies, focusing on the implications for researchers and investment practitioners. Among other insights, he showed that (1) inflation-based investment strategies conditioned on available information resulted in significant risk-adjusted returns and (2) investing using the inflation effect on companies’ net monetary holdings resulted in insignificant abnormal hedge returns whereas investing using the inflation effect on companies’ nonmonetary holdings consistently yielded economically and statistically significant abnormal hedge returns. Taken together, the study sheds new light on the cross-sectional effects of inflation, with substantial implications for valuation.