The cross-sectional effect of inflation on corporate investment and employment

This paper examines the cross-sectional effect of inflation on the investment and employment decisions. The paper shows that more heavily capitalized firms tend to have a greater reduction in the capital-labor ratio during an inflationary period. The paper also shows that firms with a higher cost of debt to wage ratios and a larger amount of depreciation shelter tend to use more labor in the inflationary period. Empirical results are generally consistent with these arguments. The authors wish to thank John Anderson, Jim Hodder, two anonymous referees and Cheng F. Lee, the Editor for their helpful comments. All remaining errors are ours.