Corporate Discount Rates
Niels Joachim Gormsen, Kilian Huber
American Economic Review · 2025 · Volume 115 · Issue 6
Abstract
We construct a dataset of firms' discount rates (i.e., required returns to capital) and perceived cost of capital using corporate conference calls. The relation between discount rates and the cost of capital is far below the one-to-one mapping assumed in standard theory, as it takes many years for changes in the cost of capital to be incorporated into discount rates. This pattern leads to large and time-varying discount rate wedges that affect firm investment. Moreover, increasing discount rate wedges can account for the recent puzzle of "missing investment." Cross-firm variation in market power and riskiness explains the evolution of wedges.
Keywords
Firm Behavior: Empirical Analysis, Interest Rates: Determination, Term Structure, and Effects, Asset Pricing, Trading Volume, Bond Interest Rates, Capital Budgeting, Fixed Investment and Inventory Studies, Capacity, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
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