A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan (original) (raw)

Human capital-based four-factor asset pricing model: An empirical study from Pakistan

Heliyon-Elsevier , 2023

This study aims to extend the Fama-French three-factor model by including human capital as a fourth factor. For this purpose, we have collected data from 164 non-financial firms from July 2010 to June 2020. To evaluate the validity and applicability of our augmented human capitalbased four-factor model, we apply the two-pass time series regression proposed by Fama-Macbeth (1973). We find that small firms outperform big firms, value stocks firms outperform growth stocks firms, and low-labor-income firms outperform high-labor-income firms. The augmented human capital-based four-factor model is valid and applicable in the context of the Pakistan equity market. The empirical results motivate academia and all investors to consider human capital in investment decisions.

Human Capital resource as cost or investment: A market-based analysis

The International Journal of Human Resource Management

This study empirically investigates the myopic behavior of the stock market toward firms' human capital resource investment, paying particular attention to two key proxies: human resource expenditure and the firm value added allocated to the employees. Focusing on human capital resource investment decisions' alignment with near versus longer-term emphasis by investors, we examine firms listed in the Financial Times Stock Exchange (FTSE) 100 over a five-year period using an established accounting-based valuation model. Our results show that human capital investment discourse leads to overweighting of the forecasted longer-term earnings in the apportionment of share price constituents, suggesting that investors consider investment in employees to generate more return in the longer-term. Additionally, our findings prove that investors respond to firm level human capital resource as an investment generating more return in the longer-term. This emphasises the importance of communicating human capital resource investment information that accurately reflects the firm value creation via employees in external financial reporting.

Role of human assets in measuring firm performance and its implication for firm valuation

Journal of Economic Structures, 2020

The purpose of the study is to evaluate the role of human asset in firm performance and its implication for firm valuation. To do so a modified five-factor model with human asset designed for capturing the size, value, profitability and investment in average portfolio returns that performs better than both Fama–French (1993) three- and Fama–French (2015) five-factor model. Study redefines CMA factors as CvMAv that includes human assets in it. The main problem with the modified five-factor model with human asset is the microcap with conservative investment stocks whose returns behave like that low-value unprofitable firms.

Is human capital the sixth factor? Evidence from US data

ACRN Oxford Journal of Finance and Risk Perspectives, 2019

Problem/Relevance: Measuring the risk of an asset and the economic forces driving the price of the risk is a challenging task that preoccupied the asset pricing literature for decades. However, there exists no consensus on the integrated asset pricing framework among the financial economists in the contemporaneous asset pricing literature. Thus, we consider and study this research problem that has greater relevance in pricing the risks of an asset. In this backdrop, we develop an integrated equilibrium asset pricing model in an intertemporal (ICAPM) framework. Research Objective/Questions: Broadly we have two research objectives. First, we examine the joint dynamics of the human capital component and common factors in approximating the variation in asset return predictability. Second, we test whether the human capital component is the unaccounted and the sixth pricing factor of FF five-factor asset pricing model. Additionally, we assess the economic and statistical significance of the equilibrium six-factor asset pricing model. Methodology: The human capital component, market portfolio, size, value, profitability, and investment are the pricing factors of the equilibrium six-factor asset pricing model. We use Fama-French (FF) portfolios of 2 x 3, 5 x 5, 10 x 10 sorts, 2 x 4 x 4 sorts, and the Industry portfolios to examine the equilibrium six-factor asset pricing model. The Generalized method of moments (GMM) estimation is used to estimate the parameters of variant asset pricing models and Gibbons-Ross-Shanken test is employed to evaluate the performance of the variant asset pricing frameworks. Major Findings: Our approaches led to three conclusions. First, the GMM estimation result infers that the human capital component of the six-factor asset pricing model significantly priced the variation in excess return on FF portfolios of variant sorts and the Industry portfolios. Further, the sensitivity to human capital component priced separately in the presence of the market portfolios and the common factors. Second, the six-factor asset pricing model outperforms the CAPM, FF three-factor model, and FF five-factor model, which indicates that the human capital component is a significant pricing factor in asset return predictability. Third, we argue that the human capital component is the unaccounted asset pricing factor and equally the sixth-factor of the FF five-factor asset pricing model. The additional robustness test result confirms that the parameter estimation of the six-factor asset pricing model is robust to the alternative definitions of the human capital component. Implications: The empirical results and findings equally pose the more significant effects for the decision-making process of the rational investor, institutional managers, portfolio managers, and fund managers in formulating the better investment strategies, which can help in diversifying the aggregate risks.

Human Capital and Investment Policy

SSRN Electronic Journal, 2018

The literature relates human capital costs to firm leverage (Berk, Stanton, and Zechner (2010) and Chemmanur, Cheng, and Zhang (2013)) and mergers and acquisitions (Lee, Mauer, and Xu (2017)). In this paper, we study the relation between a firm's human capital costs and investment policy. We first present a simple theoretical setting to illustrate the positive effects of risky investment on average employee pay. We then empirically examine the relation between firms' investment policies and human capital costs. Using two proxies for risky investment (cash flow volatility and unlevered stock return volatility), we find a significantly positive relation between risky investment and human capital cost (as measured by CEO compensation and average employee pay). The effect is stronger in low-pay firms than high-pay firms, and non-technology firms than technology firms. We further investigate four channels through which risky investment policy influences human capital costs: corporate diversification, R&D expenditures, advertising expenditures, and total value of acquisitions in a year. We find that while diversification negatively affects human capital cost, the rest of the three channels have positive effect on human capital costs. Our results are robust after accounting for the endogeneity of leverage, investment, and compensation of CEOs along with other robustness tests. Overall, our research contributes to the nascent but growing literature on the impact of human capital on firm investment and financing decisions.

The Human Capital Impact on the Shareholder Value Creation

Economia Aziendale Online, 2008

Shareholder value theory, value metrics and research financial results-1.1. Shareholder value theory-1.2. Performance metrics for measuring value-1.3. Research method and financial results-1.4 Conclusion-PART II-The human capital impact on company results-2.1 Human capital as intangible asset: measuring importance and literature-2.2. Human capital impact on shareholder return and firm value-2.3. Research method and human capital results-2.4 Conclusion.

Human Capital and Popular Investment Advice

Review of Finance, 2005

Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively, prescriptions that are difficult to reconcile with the simple mean-variance model. We show that extending the mean-variance model to include human capital, without any other modifications, can simultaneously justify both recommendations, so long as the correlation between labour income and stock returns falls within a range determined by market and investor-specific parameters. Aggregate labour income data from 11 countries generally satisfy this requirement, as do plausible individual income processes. We also consider the implications of human capital for the optimal bond/wealth ratio over the investment horizon, and examine the sensitivity of the stock/bond mix to the volatility of labour income.

The Voluntary Disclosure of Human Capital and Its Impact on the Market Value of Companies

Journal of Intercultural Communication

Human resource accounting is only an attempt to ascertain the cost and value of the company’s human resources in terms of expenditures incurred through employment, social welfare, training, development, compensation, etc., in addition to trying to judge the contribution of these factors to the economic value of the company. This research aims to study the effect of human resource variables, compensation, and welfare of employees, training expenses, and profits after tax on the value of the company. Both market capitalization and total assets were used to determine the value of the company, and 40 companies were chosen from the Iraq Stock Exchange for the year 2018 to research. To achieve the research objectives, a multiple regression model was used. This research found that compensation to employees has no significant impact to affect the market value, while employee care and training expenses and profits have a positive and significant impact on market capitalization. The current r...

THE IMPACT OF HUMAN CAPITAL INVESTMENT ON FIRM’S PERFORMANCE: INSIGHTS FROM THE LITERATURE

EPRA, 2024

With growing globalisation, competition in the market, and oversaturation of human resources, human capital is gaining more importance. Global North countries and emerging nations prioritise the development of human capital to accelerate economic growth through the necessary allocation of time and resources. The development of human capital is one of the key strategies for leading the global market. The idea of human capital was traced in the 18th century by Adam Smith and he suggested that improving human capital through training and education leads to more profitable enterprises. The concept of human capital (HC) was coined by Theodore Schultz, who defined human capital as “skills, knowledge, and similar attributes that affect particular human capabilities to do productive work." HC directly impacts on productivity, innovation, and overall competitiveness. The efficient management of HC has become a key determinant of a company's ability to adapt, grow, and maintain a sustainable competitive advantage in the dynamic business environment. So far, firms need to invest in the development of human capital. Investments made in the improvement of skills, knowledge, and education of human resources can enhance firm performance. In this context, many studies have taken place. The current study reviews the literature available from India and outside India on the same perception. Through examining the current literature, researchers can find further scope for research in the area and enhance our understanding of the concept.

Key variables in the prediction of the monetary value of human capital

2018

Abstract: Orientation: The primary focus of this study was to investigate how the extent of information disclosed on structural capital (SC), human capital (HC) and relational capital (RC), collectively termed Intellectual capital (IC) could be used to predict the organisational performance (expected future earnings) of the Johannesburg Stock Exchange (JSE) listed companies. In particular the study sought to determine how information disclosed on HC as a dimension of IC can be used to understand the relationship with the company’s internal processes and customer value as the key drivers of organisational performance. Theoretically, the concept of HC was used to measure the costs of raising children, education costs and earnings people accumulate in the labour market. In the context of IC, HC is regarded as a key determinant of value creation together with SC and RC...Ph.D. (Leadership in Performance and Change