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FINARTS Case Study 1-1

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22 views2 pages

FINARTS Case Study 1-1

Uploaded by

caramasilang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case Study 1

FINARTS

Place your answers in PDF format. Attach the code/source file to your
submission.

1. The variable mktval is market value of the firm, profmarg is a profit of percentage
of sales, ceoten is years as CEO with the current company, and comten is total
years with the company. Using the regression table below where the coefficients
is above the standard error expressed in parentheses, answer the following
questions:

a. Comment on the effect of profmarg on CEO salary?


b. Does market value have a significant effect? Explain.

2. The Ksubs dataset 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. We only use the
data for single-person households (fsize = 1)

a. How many single-person households are there in the data set?


b. Use OLS to estimate the model and report the results in the usual format.
Interpret the slope coefficients.
nettfa = β0 + β1inc + β2age + u
c. If you do a simple regression of nettfa on inc, is the estimated coefficient
much different than from the estimated model in letter b? Why or why not?
3. Regression analysis can be used to test whether the market efficiently uses
information in valuing stocks. For concreteness, let return be the total return from
a holding a firm’s stock over the four-year period from the end of 1990 to the end
of 1994. The efficient markets hypothesis says these returns should not be
systematically related to information known in 1990. If firm characteristics known
at the beginning of the period help to predict stock returns, then we could use this
information in choosing stocks.

For 1990, let dkr be a firm’s dept to capital ratio, let eps denote the earnings per
share, let netinc denote net income, and let salary denote total compensation for
the CEO.

a. Estimate the regression equation. Test whether the explanatory variables


are jointly significant at the 5% level. Is any explanatory variable
individually significant?
b. Make another estimation using the log form for netinc and salary.
c. Do any of the conclusions in letter b change from the estimation in letter
c? Explain.
d. Some firms have zero debt and others have negative earnings. Should we
try to use log(dkr) or log(eps) in the model to see if these improve the fit?
Explain.
e. Overall, is the evidence for predictability of stock returns strong or weak?

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