Corporate Discount Rates
, Neubauer Family Assistant Professor of Finance
, Assistant Professor of Economics
We construct a dataset of firms鈥� 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 鈥渕issing investment.鈥� Cross-firm variation in market power and riskiness explains the evolution of wedges.