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Nonmarketable Assets Version of the CAPM: the Case of the Russian

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Nonmarketable Assets Version of the CAPM: the Case of the Russian Nonmarketable Assets Version of the CAPM: The Case of the Russian Stock Market 173 Российский журнал менеджмента Russian Management Journal 16 (2): 173–186 (2018) 16 (2): 173–186 (2018) теоретические и эмпирические исследования NONMARKETABLE ASSETS VERSION OF THE CAPM: THE CASE OF THE RUSSIAN STOCK MARKET A. V. BUKHvaLOV Graduate School of Management, St. Petersburg University, Russia L. Z. BOKUCHava Master Program Graduate, St. Petersburg University, Russia The paper deals with a modification of the CAPM, being called the Mayers model, which takes into account the existence of nonmarketable assets. Human capital is the classic example of such assets though we present and discuss some other important examples. This ap- proach, as well as more advanced conditional CAPM, gives a correction to traditional CAPM beta coefficient as a measure of market risk. In this paper we present two attempts to test CAPM with nonmarketable assets. First, we start from analysis of the small size effect of the Russian stock market. We show that in this case the Mayers model gives the possibility of substantial improvement of risk exposure estimate. Second, empirical analysis in the case of human capital shows no impact of the Mayers model in all sectors of the Moscow Stock Exchange other than Innovation. Keywords: nonmarketable assets, CAPM, the Mayers model, Russian stock market, human capital. JEL: G11, G12, G32, J24. Capital Asset Pricing Model (CAPM) is cen- survey [Bukhvalov, 2016] the author char- tral for the discipline of corporate finance. acterized the current status of the model as During her more than half-of-the-century the foundation of the modern managerial history it has been many times criticizing, theory of the firm. CAPM has transformed rejecting, modifying and reviving. Modern from the tool aimed for asset traders to standing of CAPM, of course, shows tremen- really universal model. Now it is reflecting dous qualitative transformations. In recent and guiding every firm’s managers’ efforts Research of the first author was conducted with financial support from the grant provided by St. Petersburg University (project No. 16.23.1460.2017). Postal Address: 3 Volkhovskiy per., Graduate School of Management, St. Petersburg University, St. Petersburg, 199004, Russian Federation. © A. V. Bukhvalov, L. Z. Bokuchava, 2018 https://doi.org/10.21638/spbu18.2018.201 174 A. V. Bukhvalov, L. Z. Bokuchava through the modified concept of systematic some principle issues we still need to return risk (cf. [Babenko, Bo guth, Tserlukevich, back to not very technical versions of clas- 2016]). On the other hand, new model is sical CAPM and its modifications. It is even consistent with modern empirical trends in more reasonable because new theorists still asset pricing and trading. keep the place for application of CAPM for In this paper we will return back to the WACC evaluation and, hence, for investment early days of CAPM’s modification, i. e., to projects appraisal (see [Bukhvalov, 2016, the CAPM with nonmarketable assets. This Section 5]). That’s why we devoted this paper model appeared in the beginning of 1970s to the Mayers model. in the stream of M. Jensen’s research, which The notion of nonmarketable asset should treated CAPM as a particular case of general not been treated literally. Any nonmarket- equilibrium model [Jensen, 1972]. It was able asset can be “a little bit” traded. It invented by David Mayers, his student (see means that in a certain sense it can be sold [Mayers, 1972; 1973]). and bought with higher transaction costs, CAPM with nonmarketable assets allows or unusual efforts are needed to maintain assets owned by investors who obtain uncer- trade, or its liquidity is very low and price is tain income from this ownership but public uncertain, or institutional barriers for trade trades in such assets is impossible due to exist (but still workaround in possible), and institutional or technological issues. Mayers so on. This issue was discussed for the case himself saw the main interpretation of such of human capital as early as [Fama, Schwert, assets as a form of human capital.1 For that 1977] paper has appeared. It is very difficult reason he used sub/superscipt H for them. to model such “a little bit” feature. This Classical CAPM and the Mayers model notice was a starting for [Bukhvalov, 2008] as its extension until very recently were where the Mayers model was expanded to the only theoretical models in asset pricing include new areas of applications. theory, which had solid economic foundation Main contributions of [Bukhvalov, 2008] in the equilibrium theory. Multifactor asset are the following. First of all, a new manage- pricing models that followed the appearance rial model of the firm was invented. It was of the Fama–French three-factor model had assumed that the firm has two types of inves- applied econometrics origins. They obviously tors: most interested investors (key owners, were better fit into reality but three factors top managers, activist members of the corpo- in few years became four- and then five- rate board) and outsiders (all other sharehold- factor models. Further it became clear that, ers and speculators). This is an institutional for example, any factor related to asymme- and rather stable division. Its importance is try of returns can be associated with econo- explained by institutional asymmetry, which metrically sound risk premium, i. e., a new is caused by ability for the most interested factor. Fortunately, from the beginning of investors to implement their strategic deci- 2000s the approach from corporate finance sions, rather than informational asymmetry, and real options theory (with its stochas- which is also present. Modern strategic man- tic differential equations techniques) has agement states that each company lives in shown another perspective. Many new great uncertain and unpredictable business environ- names have appeared. The story of these ment and real options are the main tool of contributions was presented in some detail creating company’s value [Grant, 2016, Ch. 2]. in [Bukhvalov, 2016]. This modern theory Real options are designed and exercised (or is still in the shape of development. So, for not) by the most interested investors. So it is reasonable to treat real options as strate- 1 Of course, there are numerous studies on hu- gically important nonmarketable asset. Now man capital impact but they are not about the risk two values for two above mentioned classes (betas). We will not consider such researches here. of investors should be assigned to the com- RMJ 16 (2): 173–186 (2018) Nonmarketable Assets Version of the CAPM: The Case of the Russian Stock Market 175 pany. Outsiders get capitalization and usual This is related to the small size of Russian CAPM beta whereas most interested inves- stock market and sanctions, which affect tors get strategic value of the company (to the activities of Russian investors. be defined) and the Mayers beta as a measure Second, significant difference between of risk. More detailed presentation and other traditional CAPM beta and the Mayers beta applications (e. g., corporate governance) are for the Russian stock market has led to idea given in [Bukhvalov, 2008]. of analyzing for the same market the old It was also suggested that empirical iden- problem of human capital impact on mar- tification of such model can be done by means ket risks. As in [Fama, Schwert, 1977] for of analyzing M&A deals where strategic US we found impact of human capital not value appears (in the form of goodwill). The being significant for entire Russian mar- techniques from [Fama, Schwert, 1977] re- ket and most sectors but for some sectors, viewed below here seems to be appropriate primarily for Innovations, we observed its in doing so using M&A activities indices. influence. A simplified version of [Fama, It is possible to do it only for the markets Schwert, 1977] techniques was used. with a good disclosure practices like the The structure of the paper is as follows. USA. Nevertheless, all time series machin- Section 1 provides a brief introduction to ery should be checked carefully for the rel- the Mayers model and a review of [Fama, evant data. What is the source of a hope Schwert, 1977] techniques of empirical test- that techniques that has shown no impact ing. Section 2 is devoted to new applications for human capital will work with M&A. Such of the Mayers model to the Russian stock a hope exists because of high share of M&A market. Section 3 deals with the problem market in the stock market. of human capital impact. The second contribution is related with the size effect, which exists in the Mayers model. Its importance was, as far as we 1. CAPM WITH NONMARKETABLE know, noticed in [Bukhvalov, 2008] for the ASSETS first time. Namely we speak about the ratio of nonmarketable assets to marketable ones. 1.1. Brief overview Human capital, being measured as wages and salaries, is much less than the stock market The Mayers model, or Mayers CAPM, was in the USA. So, the direct use of the static invented in [Mayers, 1972; 1973] (see [Gold- Mayers model has not shown any impact. But en berg, Chiang, 1983] for further develop- sometimes nonmarketable assets are much ment). In [Copeland, Weston, Shastri, 2005, bigger than marketable ones. It happens with p. 162] a reader can find basic features and derivative securities where (broadly treated) peculiarities of the Mayers model (unfortu- open interest is much greater than the mar- nately without derivation). In Russian the ket of underlying assets and (if we will take Mayers model (including its construction, into account swaps and other advanced de- main properties, and generalization) is giv- rivative instruments) it is much greater than en in [Bukhvalov, 2008, p.
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