The effect of uncertain inflation on firm value in a multiperiod economy

Abstract

We model firm value in a multiperiod setting with uncertain inflation and show that real rates of return on the firm's securities are intertemporally dependent. The model also predicts an inverse intertemporal relationship between the real rate of return and the lagged value of Tobin'sq. We report empirical evidence in support of the hypothesized relationship. The model could explain the mean-reverting property of long-horizon stock returns reported in recent studies.