INFLATION, ELASTICITY OF DEBT, AND THE MARKET VALUE OF A FIRM.

摘要

This report is a study of the hypothesis that the market value of a business firm during periods of inflation is proportionally related to its average monetary ratio, the monetary ratio being defined as the monetary liabilities divided by the monetary assets.; The report initially reviews the economic and financial background pertaining to theories of wealth gain by business firms during inflation. It begins with Knut Wicksell's interest hypothesis and includes Reuben Kessel's wealth distribution model. It also reviews a number of financial models and their test results for the decade preceding 1978, with special recognition of the capital asset pricing models developed during that period.; The hypothesis is tested during the stagflation periods of 1969 and 1974 using a simple regression model. Additionally, Kessel's net debtor model is also tested during these same time periods. The results indicate a negative correlation to increase in market values for both models in the specific regression years. Tests of two to four year periods, excluding the recession years, indicate for Kessel's net debtor model favorable correlations in the .29 to .38 range, while the results for the proposed monetary ratio hypothesis indicate correlations between .11 to .25.; The monetary ratio model did not indicate any consistent positive correlation. Test periods of one year duration did not indicate any significant results, and negative correlations resulted in periods where there was a negative growth rate in the GNP. It may be speculated that the fear of high debt levels during periods of slowdown of business activities had a greater negative impact on the market valuation than the perceived gain through holding monetary liabilities.