Expected Stock Returns and Firms’ Perceived Cost of Capital

62 Pages Posted: 11 Dec 2020 Last revised: 27 Aug 2021

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Date Written: October 15, 2020

Abstract

Using data from a decade of surveys of corporate managers, I find evidence that firms with higher expected stock returns have a higher perceived cost of equity and use higher discount rates in capital budgeting. Variation in expected stock returns, as measured by exposure to equity risk factors, is reflected in the perceived cost of equity with implied risk premia close to those observed in financial markets. The equity risk factors are also reflected in hurdle premia and explain up to 26% of the cross-sectional variation in the hurdle rates. The results support the hypothesis that discount rates in financial markets influence corporate discount rates and thereby corporate investment.

JEL Classification: G1, G10, G12, G31, G32, G40

Suggested Citation

Gormsen, Niels Joachim, Expected Stock Returns and Firms’ Perceived Cost of Capital (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3712699 or http://dx.doi.org/10.2139/ssrn.3712699

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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