The Irrelevance of Capital Structure for the Impact of Inflation on Investment

SHALOM HOCHMAN, ODED PALMON

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Studies concerning the effect of inflation on firms' investment decisions suggest that the form of financing is relevant in assessing the effect of inflation on investment. This paper demonstrates that when the equilibrium relationship between market rates of return on bonds and stocks is considered, the effect of inflation on investment is independent of the capital structure. The paper also shows that when the “Fisher effect” is assumed to hold, the cut‐off rate of return on investment declines with anticipated inflation independently of the financing. However, if the real interest rate rises with inflation, inflation may increase the cut‐off rate. 1983 The American Finance Association

Original languageEnglish (US)
Pages (from-to)785-794
Number of pages10
JournalJournal of Finance
Volume38
Issue number3
DOIs
StatePublished - Jun 1983
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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