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Unexpected Inflation, Capital Structure And Real Risk-Adjusted Firm Performance

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Managers can improve real risk-adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk-adjusted returns to unexpected inflation. The Net Asset Value (NAV) of US equity Real Estate Investment Trusts (REITs) serves as a good proxy for nominal assets and accordingly we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real, risk-adjusted performance, and (ii) their inflation hedging qualities are inversely related to deviations from this “matching-nominals" argument. In addition to providing managers with a vehicle to maximise real, risk-adjusted performance, our findings also provide investors with the tools to infer inflation-hedging qualities of equity investments.

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2017-06-01

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capital structure; inflation hedging; real risk-adjusted performance; nominal assets; REITs

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Required Publisher Statement: © Wiley. This is the peer reviewed version of the following article: Alcock, J., & Steiner, E. (2017). Unexpected inflation, capital structure and real risk-adjusted firm performance. Abacus, 53(2) 273-298. which has been published in final form at DOI: 10.1111/abac.12102. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

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