This paper analyzes how inflation affects the performance of euro area companies depending on their capital structure. To this end, it uses the impact of unexpected changes in inflation on the equity returns of non-financial companies on the days of the publication of preliminary data on consumer price trends in 2020-22.
The results show that firms with relatively higher leverage experience higher equity returns in response to an unexpected increase in inflation. The effect is driven by the longer-term leverage component, supporting the hypothesis that the positive impact of inflation on the real value of debt may outweigh the negative impact associated with an increase in the expected burden of debt.
