Working Paper: NBER ID: w31329
Authors: Niels Joachim Gormsen; Kilian Huber
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: No keywords provided
JEL Codes: E22; E32; E43; E44; E52; G10; G12; G30; G31; G40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discount rates (E43) | investment dynamics (G31) |
| perceived cost of capital (G31) | discount rates (E43) |
| discount rate wedges (E43) | investment rate (E22) |
| market power (L11) | discount rates (E43) |
| beliefs about value creation (D46) | discount rates (E43) |