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Class Exercise Simpleregression Ceo-Salary

The document discusses using regression analysis to analyze the relationship between CEO salary (salary) and return on equity (roe). It performs a linear regression with salary as the dependent variable and roe as the independent variable, finding a positive relationship between the two but with low explanatory power (R-squared = 0.0132). It then takes the log of salary and performs the same regression, finding a stronger relationship between log(salary) and roe (R-squared = 0.0435).

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симона златкова
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80 views1 page

Class Exercise Simpleregression Ceo-Salary

The document discusses using regression analysis to analyze the relationship between CEO salary (salary) and return on equity (roe). It performs a linear regression with salary as the dependent variable and roe as the independent variable, finding a positive relationship between the two but with low explanatory power (R-squared = 0.0132). It then takes the log of salary and performs the same regression, finding a stronger relationship between log(salary) and roe (R-squared = 0.0435).

Uploaded by

симона златкова
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CLASS EXERCISE: CEO Salary and Return on Equity- Regression Analysis

. reg salary roe

Source SS df MS Number of obs = 209


F( 1, 207) = 2.77
Model 5166419.04 1 5166419.04 Prob > F = 0.0978
Residual 386566563 207 1867471.32 R-squared = 0.0132
Adj R-squared = 0.0084
Total 391732982 208 1883331.64 Root MSE = 1366.6

salary Coef. Std. Err. t P>|t| [95% Conf. Interval]

roe 18.50119 11.12325 1.66 0.098 -3.428196 40.43057


_cons 963.1913 213.2403 4.52 0.000 542.7902 1383.592

a) What is the predicted CEO salary if roe is 30%--hint: use 30 for ROE if that is how data entered in
CEOSAL1.dta
b) Calculate the predicted salaries by the regression model for each level of ROE (find yhat !!!)
using the command in Stata: predict salaryhat—note that it will be stored under salaryhat
variable in your data set (please save your data set immediately after this step).
c) Calculate the residuals, uhat, using: predict uhat, res command.
d) Show that R-squared (coefficient of determination) is computed as Model SS/ Total SS
(alternatively: Regression Sum of Squares/ Total Sum of Squares) and verify that it is 0.0132
. reg lsalary roe

Source SS df MS Number of obs = 209


F( 1, 207) = 9.41
Model 2.90054039 1 2.90054039 Prob > F = 0.0024
Residual 63.8216228 207 .308317018 R-squared = 0.0435
Adj R-squared = 0.0389
Total 66.7221632 208 .320779631 Root MSE = .55526

lsalary Coef. Std. Err. t P>|t| [95% Conf. Interval]

roe .0138626 .0045196 3.07 0.002 .0049522 .022773


_cons 6.712169 .0866445 77.47 0.000 6.54135 6.882987

How is the above regression different in terms of R-squared results? lsalary=log(salary) and is generated
with the command; gen lsalary=log(salary) in Stata.

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