Bridge over ocean
1 March 1983 Financial Analysts Journal Volume 39, Issue 2

Are Constant Dollar Disclosures Informative?

  1. J. Edward Ketz

Prior studies (in particular, those of Davidson and Weil, published in this journal during 1975) have suggested that constant dollar earnings figures diverge considerably from historical cost figures during inflationary periods. An empirical comparison of the constant dollar and historical cost earnings of a sample of 119 companies over the years 1962 to 1980 indicates, however, that divergence is likely to occur only when there has been a sharp increase in the rate of inflation (as there was in 1974). In all but three of the years from 1962 to 1980, including years of double-digit inflation, 92 per cent or more of the variation in constant dollar earnings could be explained by historical cost earnings. When the inflation rate is relatively stable, constant dollar earnings have essentially zero information content, even though the level of inflation may be high.

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