Does Human Capital Risk Explain the Value Premium Puzzle?

101 Pages Posted: 25 Feb 2014

See all articles by Serginio Sylvain

Serginio Sylvain

University of Chicago - Department of Economics

Date Written: February 24, 2014


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

JEL Classification: G100, G120, E200

Suggested Citation

Sylvain, Serginio, Does Human Capital Risk Explain the Value Premium Puzzle? (February 24, 2014). Available at SSRN: or

Serginio Sylvain (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States


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