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Why are investment hurdle rates so high? Risk or market power?

Productivity Commission staff working paper

6 June 2024

This paper by Catherine de Fontenay, Shane Evans, Jeremy Kamil, James Thiris and Josh Lipp finds that high investment hurdle rates are due to a rising market risk premium, reflecting greater perceived risk or risk aversion by investors.

The research also finds no evidence that market power played a role in explaining the high hurdle rates in Australia.

To conclude, the paper discusses the implications for investment and productivity, and questions the role of market power in Australia and the measurement of intangible capital and the risk-free rate.

An earlier version of this paper was presented at the 2022 Australian Conference of Economists.

Staff working papers are prepared and authored by individual staff to advance understanding of issues on the Commission’s supporting research program.

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