KOREA STOCK EXCHANGE (K.S.E.) was founded in 1956 and it has grown rapidly since the early 1970's as Korean industries have grown. At present, KSE provides an important source of various capitals. In the future, as Korean economy continues to grow, KSE will play an increasingly important role as the source of capital funds for various industries in Korea. As the KSE becomes a major source of funds for Korean economy, it is imperative that it acts as a focal point to bring about an efficient capital market.
In this context, stock prices are certainly of great interest to the investors. In an era of continuous inflation, there has been an understandable interest in the relationship between the changes in prices in general and those in the prices of common stocks. The knowledge of the relationship between some specific characteristics of a firm and the performance of the firm's stocks during the time of inflation would provide an insight on this concept.
The objective of this thesis is to study the above relationship. Two fundamental concepts underlying this study are as follows :
First, under the inflation which is not fully anticipated the wealth of the creditor is transferred to the debtors.
Second, the accounting system which uses historical cost in general results in transferring wealth from business to the government through the corporate tax. Three hypotheses are tested. The first is the debtor-creditor hypothesis.
The second is about the wealth transfer due to depreciation charge on the fixed asset. The third is that inventory withdrawal causes wealth transfer through the understatement of the cost of goods sold in historical accounting system.
The data on stock prices and balance sheets are extracted from those of the firms listed in KSE from Jan. 1974 to Dec. 1978.
The three hyposheses are tested with these data through various econometric methods.
According to regression analysis, the first hypothesis is accepted, but it is not conclusive whether the result that debtor firms profit from the inflation comes from the debtor-creditor hypothesis or it merely reflects the risk-return tradeoff.
The second hypothesis is accepted, showing that high capitalized firms suffer losses due to depreciation charge under inflation.
The third hypothesis is not meaningfully tested due to lack of the detailed data about the inventory withdrawal.
