Evidence presented here indicates that the relationship between stock returns and unexpected inflation differs systematically across firms. The differences are shown to be consistent with cross-sectional variation in firms' nominal contracts (monetary claims and depreciation tax shields). The differences are also partially explained by proxies for underlying firm characteristics that could create interaction between unexpected inflation and operating profitability. Finally, much if not most of the differences appear to arise because unexpected inflation is correlated with changes in expected aggregate real activity, the effects of which tend to vary across firms according to their systematic risk.

This paper develops a theory of the role of the underwriter in certifying that risky issue prices reflect potentially adverse inside information. The theory derives from the literature on the use of reputational capital to guarantee product quality. An underwriting cost/benefit paradigm is employed to generate testable implications related to announcement effects, issue underpricing, the choice of competitive versus negotiated underwriting, and the level of underwriter compensation as a function of firm-specific information. Existing empirical literature is reviewed in the context of the certification hypothesis and several new tests are conducted. All of the findings are supportive of the hypothesis.