The Influence of the Human Capital as a Component of Intellectual Capital on the Cost of Equity

The cost of equity reflects the required return of the asset for investors given the risks inherent in the asset. This measure reflects both the market risk and the risk specific to the selected company. Nowadays the most common asset pricing model is the Capital Asset Pricing Model which connect the systematic risk of the asset expressed in the beta coefficient with the expected return of the asset. However, this model received a weak empirical support on developed and emerging markets. Revealed inaccuracies of the Capital Asset Pricing Model lead to inclusion of other pricing factors which could take into account the risks specific to a particular company. In this paper I investigate the influence of human capital on the cost of equity on the basis of the three-factor model of Fama and French. The influence of human capital proved to be true for the emerging markets of India, South Africa and Russia. In addition it was found that high human capital companies outperform companies with low human capital. In general it can be concluded that despite the specificity of the markets under investigation the selected model successfully explains the change in the required return and can be applied on these markets.