Effects of Nominal Contracting on Stock Returns


Kenneth R. French

Tuck School, Dartmouth College, Hanover, NH
and National Bureau of Economic Research


Richard S. Ruback

Harvard University, Cambridge, MA
and National Bureau of Economic Research


G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research


Journal of Political Economy, 91 (February 1983) 70-96


This paper examines the effects of unexpected inflation on the returns to the common stock of companies with different short-term monetary positions, different long-term monetary positions, and different amounts of nominal tax shields. Unlike most previous studies of the effects of nominal contracting, we distinguish between expected and unexpected inflation in our tests. Surprisingly, over the 1947-79 period, there is little evidence that stockholders of net debtor firms benefit from unexpected inflation relative to stockholders of net debtor firms. We conclude that wealth effects caused by unexpected inflation are not an important factor in explaining the behavior of stock prices.

Key words: Inflation, Nominal contracting, ARIMA, Tax effects

JEL Classifications: G14, E31


Cited 53 times in the SSCI and SCOPUS through 2014
© Copyright 1983, University of Chicago
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