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

Naveed Khan; Hassan Zada; Shakeel Ahmed; Fayaz Ali Shah; Shahid Jan

doi:10.1016/j.heliyon.2023.e16328

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

Heliyon. 2023 May 16;9(5):e16328. doi: 10.1016/j.heliyon.2023.e16328. eCollection 2023 May.

Authors

Naveed Khan¹, Hassan Zada², Shakeel Ahmed¹, Fayaz Ali Shah³, Shahid Jan³

Affiliations

¹ Faculty of Management Sciences, HITEC University, Taxila 47080, Pakistan.
² Department of Management Sciences, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad 44000, Pakistan.
³ Faculty of Management Sciences, Islamia College University, Peshawar 25120, Pakistan.

Abstract

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 capital-based 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.

Keywords: Asset pricing; Four-factor model; Human capital; Labor income; Pakistan stock Exchange.