Human Capital-based four-factor asset pricing model test: Evidence from the Tehran Stock Exchange

Document Type : Original Article

Authors

Shahid Beheshti University

Abstract

The aim of this research is to investigate the impact of human capital on the explanatory power of the Fama-French three-factor model (1993) in the Tehran Stock Exchange. Given that human capital is recognized as one of the key assets of companies and can significantly influence financial performance and associated risks, this study seeks to address the existing gaps in asset pricing models that do not take this factor into account.
The research method involves analyzing data related to companies listed on the Tehran Stock Exchange over the period from 2014 to 2023, using regression models and appropriate statistical methods. To measure human capital, the growth of employee wages has been used as a criterion for analyzing this factor. Additionally, the Fama-French three-factor model has been expanded to a four-factor model by incorporating the human capital factor to examine its effect on stock return variations.
The findings of the research indicate that adding the human capital factor to the Fama-French three-factor model significantly enhances the model's ability to explain stock return variations. Specifically, the adjusted R-squared for the four-factor model is higher than that of the three-factor model, suggesting an improvement in the model's explanatory power in predicting stock returns. Furthermore, the results show that small companies with high book-to-market ratios and significant wage growth tend to have higher returns.
The conclusion of this research emphasizes that neglecting human capital in pricing models can lead to misjudgment of risk and return. Therefore, it is recommended that investors and researchers pay greater attention to the importance of human capital in financial analyses and consider this factor in their models. It is also suggested that future studies examine factors such as education, skills, and work experience to provide a better understanding of the impact of human capital on the financial performance of companies.
The aim of this research is to investigate the impact of human capital on the explanatory power of the Fama-French three-factor model (1993) in the Tehran Stock Exchange. Given that human capital is recognized as one of the key assets of companies and can significantly influence financial performance and associated risks, this study seeks to address the existing gaps in asset pricing models that do not take this factor into account.
The research method involves analyzing data related to companies listed on the Tehran Stock Exchange over the period from 2014 to 2023, using regression models and appropriate statistical methods. To measure human capital, the growth of employee wages has been used as a criterion for analyzing this factor. Additionally, the Fama-French three-factor model has been expanded to a four-factor model by incorporating the human capital factor to examine its effect on stock return variations.
The findings of the research indicate that adding the human capital factor to the Fama-French three-factor model significantly enhances the model's ability to explain stock return variations. Specifically, the adjusted R-squared for the four-factor model is higher than that of the three-factor model, suggesting an improvement in the model's explanatory power in predicting stock returns. Furthermore, the results show that small companies with high book-to-market ratios and significant wage growth tend to have higher returns.
The conclusion of this research emphasizes that neglecting human capital in pricing models can lead to misjudgment of risk and return. Therefore, it is recommended that investors and researchers pay greater attention to the importance of human capital in financial analyses and consider this factor in their models. It is also suggested that future studies examine factors such as education, skills, and work experience to provide a better understanding of the impact of human capital on the financial performance of companies.

Keywords

References

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