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Corporate Discount Rates

Author

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  • Niels Joachim Gormsen
  • Kilian Huber

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.

Suggested Citation

  • Niels Joachim Gormsen & Kilian Huber, 2025. "Corporate Discount Rates," American Economic Review, American Economic Association, vol. 115(6), pages 2001-2049, June.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:6:p:2001-49
    DOI: 10.1257/aer.20231246
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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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