Corporate Discount Rates
107 Pages Posted: 2 Aug 2022 Last revised: 6 Mar 2025
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: Suggested Citation