5. Conclusions
In this paper, we test the hypothesis that high inflation emasculates the ability of managers to use information from the stock market to make value enhancing investment decisions. Using the data from 37 emerging markets, we show that investments of firms headquartered in high inflation regimes are significantly less sensitive to stock prices than that of firms headquartered in low inflation regimes. We argue that our results are driven by the effect of inflation on the informativeness of stock prices. Inflation reduces the informativeness of stock prices, thereby leading to lower sensitivity of investment to stock prices.
