Inflation: How the market react to real and nominal differences in accounting information?
DOI:
https://doi.org/10.17524/repec.v19.e3736Keywords:
inflation, monetary correction, relevance, abnormal returnsAbstract
Objective: This study investigates how the Brazilian capital market reacts to the difference between disclosed nominal net income and equity and their estimated values, considering an adjustment for publicly available inflation. Because inflation causes reported profits to deviate from companies’ actual performance, accounting quality and comparability are affected, as financial statements reflect transactions from different periods with distinct monetary values.
Method: Using a sample of 37 publicly traded companies between 2010 and 2016, investors’ reactions to firms more or less exposed to inflation were assessed based on cumulative abnormal returns obtained through an event-study approach. Regression analyses were performed to examine the relevance of accounting figures.
Results: The findings indicate lower cumulative abnormal returns for companies with greater differences between nominal and adjusted values, suggesting that inflation-adjusted accounting figures tend to be more relevant to investors.
Contribution: This study advances the literature on the effects of inflation on accounting information and its implications for capital market investors in Brazil. The results highlight that, even in non-hyperinflationary environments like Brazil, accounting figures are not free from inflationary distortions.
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