Does Emerging Market Recognize Intangible Capital? Evidence from China

Abstract

Emerging markets are characterized by rapidly changing capital structures and advancing technology; but how well is intangible capital recognized in the capital market? This paper investigates equity market valuation of firm intangible capital and asset pricing model in the Chinese A-share market. While intangible capital is recognized as a risk factor in developed markets, we want to investigate whether this is the case in an emerging market. We derive a systematic model to identify and to value firms’ intangible capital relative to that of their industry peers and competitors. In this paper, firm intangible capital effect divides into human capital (HCF), external capital (ECF), and organizational capital (OCF). Using capital market data from China, we find that the traditional asset pricing model can be statistically enhanced by the presence of intangible capital and that market is able to recognize the value of intangible capital. Portfolios with low HCF, OCF, and ECF firms systematically outperform portfolios of high HCF, OCF, ECF firms by an average of 1.43%, 12.8%, and 4.02%. As shown in time series Fama-French three factors model, we found that the risk component proxied by intangible capital is not included in the traditional asset pricing model. Also large/state owned companies react to these risk proxies more than small/private companies.