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

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  • Konchitchki, Yaniv

Abstract

This study sheds new light on the cross-sectional effects of inflation, which have substantial implications for stock valuation. I use financial statement analysis to examine systematic stock-valuation effects of aggregate price-level changes on individual companies, focusing on the implications for both researchers and investment practitioners. I develop inflation-adjustment procedures that are straightforward for investors to implement in real time for extracting the inflation effect on individual companies. I find that inflation-based investment strategies conditioned on information available to investors as of the initial investment and rebalancing dates result in significant risk-adjusted returns. I also investigate the sources of abnormal returns to inflation-based investment strategies. Specifically, I estimate two separate components of the inflation effect on individual companies, one based on only monetary holdings (using the net position of monetary holdings) and the other based on only nonmonetary holdings. Investigating the stock-valuation implications of extracting the components-based inflation effect reveals striking evidence. In particular, investing based on the inflation effect on companies’ net monetary holdings results in insignificant abnormal hedge returns. In contrast, investing based on the inflation effect on companies’ nonmonetary holdings consistently yields economically and statistically significant abnormal hedge returns. These findings indicate that inflation-based abnormal hedge returns are driven not by the exposure of companies’ net monetary holdings to inflation but, rather, by the exposure of their nonmonetary holdings to inflation. These results are consistent with the fact that companies’ nonmonetary holdings are usually held for several years and thus accumulate inflationary effects over time whereas their monetary holdings are, on average, naturally hedged because the exposure of monetary assets cancels the exposure of monetary liabilities for the average company. In addition, I examine the direction of the stock returns to real-time investment strategies.

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  • Konchitchki, Yaniv, 2013. "Accounting and the Macroeconomy: The Case of Aggregate Price-Level Effects on Individual Stocks," MPRA Paper 52934, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52934
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jens H. E. Christensen & Jose A. Lopez & Paul L. Mussche, 2022. "Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement," Management Science, INFORMS, vol. 68(11), pages 8286-8300, November.
    2. Konchitchki, Yaniv & Xie, Jin, 2023. "Undisclosed material inflation risk," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 82-100.
    3. Lyu, Changjiang & Wang, Kemin & Zhang, Frank & Zhang, Xin, 2018. "GDP management to meet or beat growth targets," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 318-338.
    4. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.
    5. Eddie Chamisa & Musa Mangena & Hamutyinei Harvey Pamburai & Venancio Tauringana, 2018. "Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: hard evidence from Zimbabwe," Review of Accounting Studies, Springer, vol. 23(4), pages 1241-1273, December.
    6. Yuto Yoshinaga, 2016. "Market-Wide Cost of Capital Impacts on the Aggregate Earnings-Returns Relation: Evidence from Japan," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 6, pages 95-122, December.
    7. Hans B. Christensen & Mark Maffett & Lauren Vollon, 2019. "Securities regulation, household equity ownership, and trust in the stock market," Review of Accounting Studies, Springer, vol. 24(3), pages 824-859, September.
    8. Yaniv Konchitchki & Yan Luo & Mary L. Z. Ma & Feng Wu, 2016. "Accounting-based downside risk, cost of capital, and the macroeconomy," Review of Accounting Studies, Springer, vol. 21(1), pages 1-36, March.
    9. Scott Joslin, 2018. "Can Unspanned Stochastic Volatility Models Explain the Cross Section of Bond Volatilities?," Management Science, INFORMS, vol. 64(4), pages 1707-1726, April.
    10. Yaniv Konchitchki, 2016. "Accounting Valuation and Cost of Capital Dynamics: Theoretical and Empirical Macroeconomic Aspects. Discussion of Callen," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 26-34, March.

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    More about this item

    Keywords

    Accounting; Aggregate Price Levels; Capital Markets; Financial Statement Analysis; Forecasting; Hedge; Inflation; Investment; Macroeconomics; Returns; Stock Valuation;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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