I. Comment On The Effect of Profmarg On CEO Salary. Ii. Does Market Value Have A Significant Effect? Explain

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Question 1

The following table was created using the data in CEOSAL2.RAW, where
standard errors are in parentheses below the coefficients:

The variable mktval is market value of the firm, profmarg is profit as a percentage
of sales, ceoten is years as CEO with the current company, and comten is total
years with the company.

i. Comment on the effect of profmarg on CEO salary.


 if profmarg increase by 1 unit, CEO salary increase by 0.22%
ii. Does market value have a significant effect? Explain.
 t ratio (2.03) > 1.96  sig at 5%  can reject h0  have sig relationship

iii. Interpret the coefficients on ceoten and comten. Are these explanatory
variables statistically significant?
Ceoten increase  salary increase
Comten increase  salary decrease
iv. What do you make of the fact that longer tenure with the company,
holding the other factors fixed, is associated with a lower salary?

Question 2

The data set 401KSUBS.RAW contains information on net financial wealth (nettfa),
age of the survey respondent (age), annual family income (inc), family size ( fsize),
and participation in certain pension plans for people in the United States. The wealth
and income variables are both recorded in thousands of dollars. For this question, use
only the data for single-person households (so fsize = 1).
i. How many single-person households are there in the data set?

 Count if fsize==1

 2,017

ii. Use OLS to estimate the model


nettfa=β 0 + β 1 inc + β 2 age+u
and report the results using the usual format. Be sure to use only the single-
person households in the sample. Interpret the slope coefficients. Are there
any surprises in the slope estimates?


OR

iii. Does the intercept from the regression in part (ii) have an interesting
meaning? Explain.

iv. Find the p-value for the test H0: β 2 = 1 against H1: β 2 < 1. Do you reject H0
at the 1% significance level?

v. If you do a simple regression of nettfa on inc, is the estimated coefficient


on inc much different from the estimate in part (ii)? Why or why not?
Question 3
The following model allows the return to education to depend upon the total amount
of both parents’ education, called pareduc:
log ( wage )=β 0 + β 1 edu+ β2 educ . pareduc+ β 3 exper + β 4 tenure+ u
i. Show that, in decimal form, the return to another year of education in this
model is
∆ log ( wage ) / ∆ educ=β 1 + β 2 pareduc
What sign do you expect for β 2? Why?

ii. Using the data in WAGE2.RAW, the estimated equation is


(Only 722 observations contain full information on parents’ education.)
Interpret the coefficient on the interaction term. It might help to choose two
specific values for pareduc—for example, pareduc = 32 if both parents have a
college education, or pareduc = 24 if both parents have a high school
education—and to compare the estimated return to educ.
iii. When pareduc is added as a separate variable to the equation, we get:

Does the estimated return to education now depend positively on parent


education? Test the null hypothesis that the return to education does not
depend on parent education.

Question 4

Use the data in VOTE1 for this exercise.

i. Consider a model with an interaction between expenditures:

What is the partial effect of expendB on voteA, holding prtystrA and expendA
fixed? What is the partial effect of expendA on voteA? Is the expected sign for
β 4 obvious?
ii. Estimate the equation in part (i) and report the results in the usual form. Is the
interaction term statistically significant?
iii. Find the average of expendA in the sample. Fix expendA at 300 (for $300,000).
What is the estimated effect of another $100,000 spent by Candidate B on
voteA? Is this a large effect?
iv. Now fix expendB at 100. What is the estimated effect of expendA = 100 on
voteA? Does this make sense?
v. Now, estimate a model that replaces the interaction with shareA, Candidate
A’s percentage share of total campaign expenditures. Does it make sense to
hold both expendA and expendB fixed, while changing shareA?

Question 5

Use the data in MLB1.RAW for this exercise.


Lsalary = years gamesyr bavg hrunsyr
i. Use the model estimated . What happens to the statistical significance of
hrunsyr? What about the size of the coefficient on hrunsyr?
ii. Add the variables runsyr (runs per year), fldperc (fielding percentage), and
sbasesyr (stolen bases per year) to the model from part (i). Which of these
factors are individually significant?
iii. In the model from part (ii), test the joint significance of bavg, fldperc, and
sbasesyr.

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