Abstract
This paper analyzes investor behavior depending on the flow-through capability (FTC) in the US stock market, because investors seek protection from inflation rate changes, and the FTC (a firm's ability to transmit inflation shocks to the prices of its products and services) is a key factor in investment decisions. Our estimates of the FTC of firms listed on the US stock exchange at the sector level are significantly different among industries, and we demonstrate a direct relationship between changes in stock prices (at the sector level) and FTC. These results would be relevant because they have important implications on investor behavior.
Highlights
Campbell (2006), Sekscinska (2015), and González et al (2016), among others, point out that investor behavior is concerned about managing the economic and financial risk
This study assumes that the investor behavior may be different depending on the Flow-through capability (FTC), because investors want to protect from interest and inflation rate changes (González et al, 2016), so the FTC is a relevant factor in investment decisions
Β0 represents the independent term, β1 is the coefficient that measures the variation in turnover for each activity sector as a result of unit variations in operating costs, β2 is the FT coefficient—that is, it measures the capability of companies in the sector to transmit to prices inflation shocks in the economy—and εt alludes to the error term
Summary
Campbell (2006), Sekscinska (2015), and González et al (2016), among others, point out that investor behavior is concerned about managing the economic and financial risk. A measure of the firm’s ability to transmit inflation shocks to the prices of its products and services could be really relevant for investors and portfolio managers. The main objective of this research is to estimate the capability of American companies to transmit inflation shocks to the prices of the products that they sell and/or the services that they provide (Asikoglu and Ercan, 1992; Jareño and Navarro, 2010) and to identify any significant differences among sectors, because the investor behavior may be quite different depending on this flow-through capability. Flow-through capability (FTC) is defined as a firm’s ability to transmit inflation shocks to the prices of its products and services. The authors conclude that the negative effect of an increase in the inflation rate on the stock price of a company is inversely related to the company’s capability to transmit inflation shocks to its prices
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