DOES INFLATION SIGNIFICANTLY AFFECT STOCK INVESTMENTS AND THEIR PRICE?

This paper uses data from 7 emerging markets and shows that investment of firms headquartered in countries with higher inflation is significantly less sensitive to their stock prices than that of firms headquartered in countries with lower inflation. We argue that stock prices are less informative in countries with high inflation. As a result, managers are less likely to use stock prices in their investment decisions, thereby lowering sensitivity of investment to stock prices in countries with higher inflation.

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