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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Corporate Discount Rates

  • Niels Joachim Gormsen
  • Kilian Huber
American Economic Review
vol. 115, no. 6, June 2025
(pp. 2001–49)
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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.

Citation

Gormsen, Niels Joachim, and Kilian Huber. 2025. "Corporate Discount Rates." American Economic Review 115 (6): 2001–49. DOI: 10.1257/aer.20231246

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill