Corporate Discount Rates

107 Pages Posted: 2 Aug 2022 Last revised: 6 Mar 2025

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Kilian Huber

University of Chicago - Booth School of Business

Date Written: August 2, 2022

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: discount rates, cost of capital, investment, financial markets, risk, market power, Tobin's Q

JEL Classification: E22, E32, E43, E44, E52, G10, G12, G30, G40, G31

Suggested Citation

Gormsen, Niels Joachim and Huber, Kilian, Corporate Discount Rates (August 2, 2022). Available at SSRN: https://ssrn.com/abstract=4160186 or http://dx.doi.org/10.2139/ssrn.4160186

Niels Joachim Gormsen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Kilian Huber (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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