Is the Innovation Factor Priced? ——An Empirical Study on the A- Share Pharmaceutical Industry Based on CAPM, Fama-French, and Five-Factor Models

Abstract

As an innovation-driven industry, the pharmaceutical industry's value creation model poses challenges to traditional asset pricing theories. This study aims to systematically test the explanatory power of the Capital Asset Pricing Model (CAPM), the Fama-French three-factor model, and a five-factor model including patent factor (PAT) and R&D factor (RDI) in the A-share pharmaceutical industry, and to explore whether innovation activities constitute an independent systematic risk factor. This study selects data from A-share pharmaceutical listed companies from January 2010 to December 2024, based on the CSMAR database, and constructs the pharmaceutical industry's excess return as the dependent variable. Drawing on the Fama-French portfolio sorting method, patent factor and R&D factor characterizing corporate innovation capability are constructed. Using time-series regression methods, empirical tests are conducted on the CAPM, three-factor, and five-factor models, and their performance is evaluated by comparing the goodness-of-fit (R²), factor significance, and pricing error (Alpha) of each model. The empirical results show that: (1) The Fama-French three-factor model has the strongest explanatory power, with an adjusted R² of 0.5719, and it effectively eliminates the significant Alpha (0.1259) in the CAPM model, substantially reducing the pricing error; (2) The pharmaceutical industry exhibits significant growth characteristics, with a significantly negative coefficient for the value factor (HML); (3) The impact of the size factor (SMB) is not significant; (4) The newly constructed patent factor and R&D factor are both insignificant (P-value > 0.7) in the five-factor model, failing to provide incremental explanatory power, and the R² of the five-factor model (0.5019) does not show significant improvement. This study confirms the applicability of the Fama-French three-factor model in the A-share pharmaceutical industry but finds no evidence of a significant risk premium for innovation factors. This suggests that the current A-share market may underprice the innovative activities of pharmaceutical companies, or that the realization of innovation value is long-term and complex. The research results provide theoretical basis and practical insights for investors, enterprises, and regulatory agencies.