Empirical Study Of Value Relevance Of Human Capital In Chinese Stock Market

Although intangibles are acknowledged as a crucial investment parameter of firm performance, the finance literature has no unified answer to the question of whether, and to what degree, the stock market is able to recognize the quality of human capital input, i.e., whether the firm could transfer the human capital input into market value efficiently compared to their competitors.Intangibles are very complicated, not only because former researchers have made completely different classifications about them, also because not all of them are required to be recognized in the balance sheet. So to tackle this problem, the first thing need to set straight is the classifications of them, and then we can look into the value or the value relevance of each one of them.The intellectual capital discussed in my research breaks down into three categories:human capital, organizational capital, and external capital, which will be defined in detail afterwards, while only the first one is going to be discussed in detail in this paper.In spite of hard attempts to value the contribution of intellectual capitals, scholars have failed to establish a valid and reliable model for measuring intellectuals in monetary terms and hence led to slow and inconclusive progress in this area. From the foregoing discussion, the link between human capital and company performance is convincing. However, the range of intellectual capital is very broad, encompassing many elements. How to construct a model to illustrate the relationship between intellectual capital and performance, and how to define and value the variables are the most arbitrary questions laying in front of academia.The problem of to what extent could human capital investment efficiency impact firm efficiency is going to be studied in this paper. I used my previous model EVMHC (Excess Value of Marginal Human Capital)7, which was a big improvement of the existing model EVHC (Excess Value of Human Capital)8to construct my research. As the Chinese financial market is not as efficient as those mature financial markets, not every decision could be explained by rational theories, but by behavioral biases. As one of the most important emerging market in the world, Chinese stock market is subject to the impact of human capital to a large extent. I am going to introduce new analysis results of this model in this paper using Fixed Effects model and Vector Autoregression model. From the perspective of both public image and management efficiency, how a company makes human capital investment decisions could influence the market return is also explored in this paper.The model used in this paper was derived from the inspiration of the existing model EVHC, which uses the number of employees as measurement of human capital input. In order to overcome the problems occurred in EVHC, I derived a new model excess value of marginal human capital input (EVMHC)9. This model is a measurement of firm’s efficiency in outperforming its competitors in transforming human capital input into market value.The vigorousness of the research is reflected is the following ways:1. I have compared and deeply analyzed the existing three types of human capital models, which are human resource management and corporate performance, human capital management and corporate market value, and valuing human capital and other intangible assets.2. I have settled the existing contradictions between these camps of research:is it useful to value intangible asset? In what way and to what extend is the company value influenced by human capital? Is there a perspective difference between the view of investors and managers? Is the influence of stock or flow of intangibles accountable for value relevance?3. I have proved that EVMHC is a measurement of human capital efficiency and explored the internal machenism between human capital and stock return. Analyzing the Shanghai stock exchange market, and taking into the account the special Chinese market characteristics, I am first going to briefly introduce what was found in the model using PLS in previous research, but the core of this research is using Fixed Effects model and VAR model to deeply analyze the same data. I have found some very exciting results using these two methods.Using PLS based on my previous study, I have found that portfolio of positively high EVMHC firms systematically outperform portfolio of low EVMHC firms by23%p.a. I also found that EVMHC and book-to-market value are negatively correlated, which could be considered as a unique feature for the Chinese stock market.In the second section, I am going to use Fixed Effects model and to add in two types of dummy variables:Year Dummies and Industrial Dummies. I have found that:although during2007and2008, Chinese stock market has experienced some huge volatility, but the positive relationship of EVMHC and stock return is significantly enhanced using year dummies. And another significant finding is that the problem of multicolinearity between EVMHC and B/M I have suspected before has been solved at this stage. The same level of significance was also found using industrial dummies.The third section, which is the core of this research, is using VAR to analyze the lag relationship between EVMHC and stock return. I am trying to find the answers to the following questions:1. Is the effect of EVMCH on stock return reflected in one year or the effect will last? And how long is that effect?2. After the initial influence of EVMHC on return, is return going to influence EVMHC, i.e. the efficiency of human capital? After analyzing, I have found that:there is a long term potential influence of EVMHC over stock return, just as the short term positive influence. However, from the mid term, EVMHC has a negative influence over stock return, which indicates that EVMHC also should be considered as a mispricing measure, just like EVHC. Another interesting finding is that EVMHC is also influenced by stock returns, which proves that the market capitalization and company image compared with its competitors could significantly enhance the attitude of employees and the working environment, which hence improve the efficiency of human capital in the firm.