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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.
