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The WACC Fallacy: The Real Effects of Using a Unique Discount Rate
Social Science Research Network
We document investment distortions induced by the use of a single discount rate within firms. According to textbook capital budgeting, firms should value any project using a discount rate determined by the risk characteristics of the project. If they use a unique company-wide discount rate, they overinvest (resp. underinvest) in divisions with a market beta higher (resp. lower) than the firm's core industry beta. We directly test this consequence of the "WACC fallacy"and establish a robust anddoi:10.2139/ssrn.1764024 fatcat:2unwqz74cffndeppexwcugdbgy