Does inflation affect sensitivity of investment to stock prices? Evidence from emerging markets

This paper uses data from 37 emerging markets and shows that investment of firms head-quartered in countries with higher inflation is significantly less sensitive to their stock prices than that of firms headquartered in countries with lower inflation. We argue that stock prices are less informative in countries with high inflation. As a result, managers are less likely to use stock prices in their investment decisions, thereby lowering sensitivity of investment to stock prices in countries with higher inflation.