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The Role of the Discount Rate in Investment and Employment Decisions

Published online by Cambridge University Press:  02 November 2021

Stig Vinther Møller Open the ORCID record for Stig Vinther Møller [Opens in a new window]  and
Richard Priestley
Stig Vinther Møller*
Affiliation:
Department of Economics and Business Economics, Aarhus University and Danish Finance Institute
Richard Priestley
Affiliation:
Department of Finance, BI Norwegian Business School [email protected]
*
[email protected] (corresponding author)
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Abstract

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Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 914 - 938
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee for very useful comments and suggestions. Møller acknowledges support from the Danish Finance Institute and from the Independent Research Fund Denmark (7024-00020B).

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