INFLATION, INVESTMENT, AND DEBT

Alexandros P. Prezas

Journal of Financial Research, 1991, vol. 14, issue 1, 15-26

Abstract: In this paper the effect of inflation on firms' investment and debt‐financing decisions is examined. Inflation affects optimal investment and financing directly through the probability of accounting loss and the real value of depreciation and interest tax shields. In addition, when corporate and differential personal taxes cause investment and financing decisions to interact, inflation has indirect effects on these decisions through their interactions. In general, the overall effects of inflation on optimal investment and debt are ambiguous in sign. For tax‐exempt firms, however, optimal investment and debt are independent of inflation. For firms that are always in a tax‐paying position, higher inflation reduces optimal investment without affecting optimal debt. Furthermore, inflation causes total firm value to decrease if the depreciation rate exceeds the firm's debt/asset ratio.

Date: 1991
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/j.1475-6803.1991.tb00641.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:14:y:1991:i:1:p:15-26

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-2592

Access Statistics for this article

Journal of Financial Research is currently edited by Jayant Kale and Gerald Gay

More articles in Journal of Financial Research from Southern Finance Association Contact information at EDIRC., Southwestern Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().