A CEO Survey of U.S. Companies' Time Horizons and Hurdle Rates

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A survey of CEOs at Fortune 1,000 firms asked about their firms' hurdle rates and time horizons. Survey results suggest that most U.S. firms use hurdle rates that are higher than standard cost-of-capital analyses would suggest. The average discount rate applied to constant-dollar cash flows was 12.2 percent, distinctly higher than equity holders' average rates of return and much higher than the return on debt during the past half-century. At the time of the survey, the fall of 1990, U.S. CEOs believed that their firms had systematically shorter time horizons than their major competitors in Europe and (especially) Asia. U.S. CEOs also thought that government policy is a powerful agent affecting corporate planning horizons. They saw several policy reforms, including a cut in corporate tax rates, a permanent R&D tax credit, a corporate tax deduction for dividend payments, and a credible commitment to a stable tax policy for the next decade, as policies that could lengthen planning horizons.

James Poterba is professor of economics, MIT, and director of the Public Economics Research Program, National Bureau of Economic Research. Lawrence Summers is Undersecretary for International Affairs, U.S. Department of the Treasury.

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