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

  • Author(s): SHALOM HOCHMAN, ODED PALMON
  • Published: Apr 30, 2012
  • Pages: 785-794
  • DOI: 10.1111/j.1540-6261.1983.tb02501.x

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.

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