Is human capital the sixth factor?

Abstract

Purpose The purpose of this paper is to focus on one of the major emerging Asian economies – India – to examine the role of human capital in asset prices. Design/methodology/approach The analysis uses various statistical techniques (e.g. multifactor regression model, 3D graphs, GRS test and residual graphs) to test the role of human capital in asset prices. Findings A six-factor model designed for capturing the size, value, profitability, investment and human capital patterns in average portfolio returns performs better than both Fama–French’s (1993) three- and Fama–French’s (2015) five-factor model. The main problem of six-factor model is its failure in capturing the average returns on “microcap with low-value stocks that are highly profitable invests aggressively for asset growth but invests much lesser for human growth” and “microcap with unprofitable stocks whose returns behave like those of low-value firms with conservative investment”. The study finds the investment factor (CMA) of Fama–French’s (2015) five-factor model as the redundant factor for describing the portfolio average returns in the study sample. Research limitations/implications The paper argues that human capital also plays a role in predicting returns. This has significant public policy content. Originality/value The present study is novel for several reasons: first, it includes six-factor model descriptions; second, no comprehensive asset pricing study is done with human capital in Asian emerging markets, especially in India. Perhaps, this is the first study to examine whether portfolio returns are affected by the human capital in the Indian context. Third, the study period and methodology used are completely different from the previous studies.