Does Human Capital Risk Explain The Value Premium Puzzle?

Serginio Sylvain ()

MPRA Paper from University Library of Munich, Germany

Abstract: Using a general equilibrium model with endogenous growth, I show that risk to human capital leads to a “Value” premium in equity returns. In particular, firms with relatively more firm-specific human capital or more positive covariance between asset growth and returns on human capital are less valuable (and hence have greater Book-to-Market Equity) and yield greater expected equity returns since human capital is more tied to the fate of said firms. Thus, I reproduce some of the results of Fama and French (1996) and show that in the model their HmL factor is a proxy for human capital risk as measured by macroeconomic and financial variables such as the covariance between human capital growth, or labor income growth, with the growth rate of firm assets. The model implies relatively lower investment-to-asset ratio and lower average asset growth for Value firms as observed in data and as argued in Zhang (2005). Furthermore, the model yields counter-cyclical Value premium and relative Book-to-Market Equity, greater long-run risk exposure for Value firms, and failure of the CAPM. Hence, it replicates several results from the related literature.

Keywords: Adjustment cost; Book-to-Market Equity; Endogenous growth; General equilibrium; Human capital; Value Premium (search for similar items in EconPapers)
JEL-codes: E20 G10 G12 (search for similar items in EconPapers)
Date: 2014-03-14
New Economics Papers: this item is included in nep-dge, nep-hrm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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