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Learning about Discount Rates

Author

Listed:
  • Dessaint, Olivier
  • Gondhi, Naveen
  • Peress, Joël

Abstract

Using data on firm managers’ beliefs about cashflow growth (g) and discount rates (k) in M&A transactions, we examine what they learn from target stock prices. Before correcting for endogeneity, both appear sensitive to prices---positively for g, negatively for k, and with equal magnitude---suggesting managers learn about both. However, using noise in prices as an instrument, only k reacts—with corrected estimates indicating that 89\% of managers’ information about k comes from prices. Therefore, stock markets provide insights into risk and the compensation it requires, but not cashflows, which managers already understand well. Cross-sectional tests reinforce this conclusion.

Suggested Citation

  • Dessaint, Olivier & Gondhi, Naveen & Peress, Joël, 2025. "Learning about Discount Rates," CEPR Discussion Papers 20121, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20121
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    File URL: https://cepr.org/publications/DP20121
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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