The Impact Of Unexpected Inflation On The Stock Returns In China

In recent years,the international financial market turmoil,the weak economy,many countries(the United States,the European Union and Japan) have adopted quantitative easing policy,in order to stimulate the growth of the national economy.The consequences caused by the beggar-thy-neighbour policies has transmited internationally, which will cause fluctuations in foreign exchange rates,and leads to inflation expectations.At the same time,the stock market has also presented the fluctuation trend in our country caused by macro and micro factors.The relationship between stock returns and inflation has always been the focus of attention of all sectors of the community.However,most of the academic circles analyze the relationship between the two economic variables from the macro perspective,which is seldom studied from the micro level of the enterprise.When inflation expectations exist,companies tend to borrow money and reduce cash holdings.These phenomena also provide a realistic support for the relationship between stock returns and inflation from the micro perspective of the enterprise.This paper investigates the impact of unexpected inflation with different monetary positions on stock returns from the perspective of nominal contracting effect,which provides a micro-level interpretation for the process and mechanism of the impact of inflation on assets pricing.Firstly,applying the data of China listed companies over the 1991-2014 period,the data of consumer price index and fixed-effect regress,we investigated the relationship among the unexpected inflation rate,the monetary status of the firms,the stock return rate and tested the effect of the tax-shield at the same time.Secondly,we analysed the influence of the term factor on the relationship between stock returns and unexpected inflation by dividing the nominal contract into long and short term contracts.Thirdly,classifying the companies according to their level of currency status,we verified the nominal contract hypothesis furtherly.Lastly,We studied the performance of stock returns in different industries by classifying the companies according to their industries.According to the empirical research we found that:(1)Our results support nominal contracting hypothesis and the tax-shield hypothesis,implying that firms with credits(debts)loss(gain) from increase in unexpected inflation.(2)Firms with more short-term monetary contracts are less affected by higher-thanunexpected inflation.(3)Firms with more credits(debts) induce more losses(gains) for creditor(debtor) firms.(4)Returns of cyclical industries and public utilities are more sensitive to the unexpected inflation than other industries, because they own more long-term contracts.