Inflation Accounting and Stock Returns: Evidence From Istanbul Stock Exchange (ISE)

The purpose of this study is to show the importance of inflation accounting application in investment decision making in particular in stock markets. The effect of inflation accounting on stock returns is examined among the Turkish firms listed on the Istanbul Stock Exchange (ISE) in 2003. Descriptive statistics compared the predictability level of inflation-adjusted and inflation non-adjusted fundamental accounting signals on stock returns. Regression analysis tests the explanatory power of these two different accounting applications on stock returns. The results show that investors mainly take earnings and inflation-adjusted fixed asset ratio into consideration when they make their investment decisions. Furthermore, the results show that inflationadjusted results have slightly more predictive power for stock returns than inflation non-adjusted results suggesting the fact that both inflation-adjusted and inflation nonadjusted financial data complement each other.