Corporate Discount Rates
Niels Joachim Gormsen and Kilian Huber – Working paper, September 2022

A new database of firms’ discount rates and costs of capital. The perceived cost of capital is related to the financial cost of capital, but the wedge between discount rates and the perceived cost of capital has grown substantially over the past decades. These dynamics have important implications for how interest rates and asset prices affect corporate investment.

Equity Factors and Firms’ Perceived Cost of Capital
Niels Joachim Gormsen and Kilian Huber – Working Paper, January 2023

Consistent with Modigliani-Miller, leverage is negatively related to the perceived cost of capital, but, in contrast to the theory, unrelated to the perceived cost of equity. CAPM betas are strongly reflected in the costs of equity and capital as well as discount rates. Moving from the CAPM to the Fama and French 3-factor model improves explanatory power. We explore the modern “factor zoo,” finding that less than 10 percent of factors are significantly reflected in the perceived cost of capital.

Climate Capitalists
Niels Joachim Gormsen, Kilian Huber, and Sangmin Oh – Working Paper, February 2023

“Green investing” has real effects if green firms actually reduce their perceived cost of capital and discount rate in response to green investing. We find that the difference in the perceived cost of capital between the greenest and the brownest firms has fallen since 2016, concurrent with the rise of green investing. Discount rates followed a similar pattern. A survey sheds light on the mechanisms. In a simple model, the observed differences reduce firm-level emissions by 20 percent.