NEW YORK, NY — Even as inflation seems to be returning to manageable levels, consumers and businesses alike remain wary of runaway prices and react strongly to changes in expected inflation. According to new research from Columbia Business School, these reactions inform about firms’ growth prospects. A new study done by Professor Sehwa Kim and his coauthors examines whether the stock market’s reaction to changes in interest rates and inflation provides valuable insights about firms’ projected growth.
Although market commentators have often speculated that stocks reacting negatively to interest rates and inflation hikes tend to be high-growth companies, there has been no empirical evidence to support these claims. In the study, “Interest Rate Sensitivities, Firm Growth Rates, and Stock Returns,” Sehwa Kim, Doron Nissim, the Ernst & Young Professor of Accounting & Finance, and doctoral student Min Jun Song '26 found that a company's stock price reaction to interest rate changes doesn’t predict its growth, but the sensitivity to changes in expected inflation does—companies whose stock prices are negatively affected by inflation tend to grow faster and more consistently. Even more interestingly, analysts ignore this information when formulating their long-term earnings growth forecasts. The research highlights that ignoring inflation sensitivity leads to consistently biased growth predictions.
“Inflation sensitivity has not received much attention as a predictor of firm growth,” said Professor Kim, Assistant Professor at Columbia Business School. “By focusing on inflation sensitivity, analysts could significantly reduce the bias in their long-term growth projections.”
Professor Kim and his co-researchers examined the average percentage of firms that consistently deliver above-median growth and compared those numbers to the sensitivity of each firm to inflation. They found that 12.5 percent of firms with low expected inflation sensitivity sustain above-median growth each year over the next five years, whereas only 6.1 percent of high-sensitivity firms achieve that same level of growth. However, the team found that analysts often predict higher, not lower, growth for firms with high inflation sensitivity.
Additional Findings:
- Misplaced optimism about inflation sensitivity is very common: A review of long-term earnings forecasts revealed that analysts frequently link higher growth with greater inflation sensitivity, leading to overly optimistic predictions for such companies.
- What explains the bias in analysts’ forecasts? A potential mediating factor is “market beta,” or the stock return sensitivity to the overall market. The team found that stocks with high expected inflation sensitivity tend to have high market betas. Institutional investors are known to favor high market beta stocks, and analysts may be issuing overly optimistic growth forecasts to align with the preferences of their key clients.
- The optimistic bias leads to predictable return patterns: In line with the optimistic bias in analysts’ long-term growth projections, firms with high inflation sensitivity deliver predictably lower stock returns over the subsequent three years. A long-short portfolio capitalizing on this predictability generates an annualized hedge return of approximately 6% over that period.
These findings show how important it is to consider a company’s sensitivity to inflation when evaluating its long-term growth,” said Professor Kim. “Investors and analysts can substantially reduce their bias about expected growth forecasts by considering this factor. Future research could help create better tools for understanding growth based on inflation sensitivity,” said Professor Kim.
To learn more about the cutting-edge research being conducted, please visit the Columbia Business School.
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