Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices

Abstract

This study investigates nominal financial reporting and its implications for firm's performance and stock prices under inflationary condition. To do so, the correlation between unrecognized inflation gains or losses as independent variable and future operating cash flows, future cash flows from sale of assets and abnormal returns on portfolios constructed on unrecognized inflation gains or losses as dependent variables was examined. Independent variable was calculated by inflation adjustment algorithm (Konchitchki, 2009). To investigate the relationship between independent and dependent variables Barth, Cram, and Nelson (2001), Konchitchki (2009), and Fama and French (1993) models were used. Pearson statistical analysis was applied to test the hypotheses. Using data for 98 listed companies on Tehran Stock Exchange from March 2000 to February 2009, the results shows the higher unrecognized inflation gains or losses of a firm, the lower future operating cash flows is expected. Moreover, such firms tend to sell their fix assets and have lower stock returns in future.

Keywords

• nominal financial reporting
• inflation
• unrecognized inflation gains or losses
• abnormal return