Discussion paper
DP19966 Inflation, Leverage and Stock Returns
We show that inflation affects stock returns through a long-term leverage channel. Using a high-frequency identification strategy, we analyze stock returns in response to inflation surprises for non-financial firms in the U.S. and the Euro Area from 2020 to 2022. We rely both on survey-based and market-based measures of inflation surprises. We find that firms with higher leverage experience larger stock returns following positive inflation surprises, and this is driven by long-term debt. The effect is stronger in countries with inefficient corporate debt resolution. Our findings align with a Fisherian mechanism, where inflation reduces the real value of long-term debt.
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