Assessing the impact of inflation on business performance under conditions of limited financial disclosure : the case of firms operating in Greece

Abstract

The proper assessment of the effect of inflation upon the performance of firms is seriously impaired
by the absence of a suitable adjustment method and adequate historical-cost accounting data. The
methodology proposed herein provides a sophisticated approach in evaluating inflation-related performance
under conditions of limited financial disclosure. It is built around the General Price Level Adjustment
model. Its significance is tested in assessing the impact of double-digit inflation rates upon the
performance of a sample of firms operating in Greece.
1. Introduction
Inflation continues to be a fact of economic life in most countries. High
inflation rates have seriously eroded monetary values in these countries over the
past two decades, and have brought forth new patterns of economic behavior.
Even so, the effects of inflation on the performance of every economic unit
go unrecognized in published financial statements. Businesses continue to report
historical cost accounting data without providing supplementary information on
management's ability to protect its financial capital from the erosive power of
rising prices.
These conditions and the absence of adequate historical cost accounting
data seriously impair investor capacity to properly evaluate management performance.
Investors apply a common adjustment factor to all items in the
income statement in assessing the impact of inflation upon a firm's performance.