Measuring Firm-Level Inflation Exposure : A Deep Learning Approach

We develop a novel measure of firm-level inflation exposure by applying a deep learning model to firms' earnings conference call transcripts. Our methodology not only identifies sentences that discuss price changes but also differentiates price increases from price decreases and input prices from output prices. In the time series, our aggregate inflation exposure measure strongly correlates with official inflation measures. In the cross section, firms that have higher inflation exposure experience a strong negative stock price reaction to earnings calls. Firms' pricing power attenuates the negative market reaction. Consistent with the market reaction, firms with higher inflation exposure have higher future costs of goods sold and lower operating cash flows. Last, high inflation exposure firms perform worse on Consumer Price Index (CPI) release days, in particular when the CPI release is salient and the CPI is higher than the consensus forecast