An examination of the role of intellectual capital in asset pricing: An empirical study on the EGX100

Abstract

The aim of this study is to propose an improvement to the CAPM1 by adding the intellectual capital components to the it to help in improving the calculation of the excess return. In order to assess the relationship, the quarterly panel data of the 100 firms listed in the EGX 1002 , for the period from December 2013 till September 2018, were used to conduct the test. The author tested whether the intellectual capital components, as measured by Pulic (VAIC)3 , can be used as a factor in measuring the excess return of a stock or not. The results of this paper showed that the excess return is cointegrated with all of the independent variables. Moreover, the results of the GLS regression and the Fama-MacBeth regression showed that the VAICCAPM4 outperformed the FF model. However, they also showed that both models cannot be used to estimate the stock’s return of the companies listed in the EGX100. Moreover, the GLS5 and the FM6 regressions showed that the CAPM model is the only model that can be used to estimate the stock’s return of the companies listed in the EGX100. The original CAPM model is the simplest and the most used model to assess the risk and the risk premium of a certain investment. However, this model has a lot of criticism because of its simplicity. One of the limitations is that it doesn’t take into consideration the performance of the company when calculating the excess return. Even though many authors in the past tried to come up with new models to improve the original CAPM model, they all were only interested in the financial factors that affect the company’s performance. This paper is one of the first researches done that adds the intellectual capital of the firm to the capital asset pricing model. Moreover, the author then compares this model’s performance to the CAPM and the FF7 models.