running the regression using certain programs e-view and sas
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Running the regression using certain programs
E-view and SAS
Title and hypotheses
• How size, leverage and R&D expenditures affect firm earnings?
• Size-to-earning relationship– Ferri and Jones (1979) and Smith and Watts (1992) s
uggest that larger firms have easier access to capital markets and are able to borrow at more favorable interest rates.
– Moreover, studies by Panzar and Willig (1979), Eckard (1990) and Paul (2001) address the effect of scale economies derived from firm size.
• Debt-to-earnings relationship– Modigliani and Miller (1958), no consistent predictions
have been reached of the relationship between profitability and leverage
– Tax-based models suggest that profitable firms should borrow more, ceteris paribus, as they have greater needs to shield income from corporate tax.
– Pecking order theory suggests firms will use retained earnings first as investment funds and then move to bonds and new equity only if necessary. In this case, the leverage-earnings relationship should be negative.
• R&D-to-earnings relationship– Numerous empirical studies including Schoen
ecker and Swanson (2002); Healy et al. (2002); Ballester et al. (2003) and Monahan (2005) have showed the positive impact of R&D investment on firm earnings
Regression
ititiit uxy '
Data
• Sample S&P500 firms over the 10-year period from 1996 to 2005 are analyzed.
• Financial firms are excluded from the sample because the nature of their liabilities and capital structure intrinsically differ from those of non-financial firms.
• The overall sample consists of a total of 212 firms and a total of 2,078 observations of annual financial data.
• All data are obtained from the Compustat database.
Proxy variables
Table 1 Definition of dependent/independent variables
Variables Definitions
Dependent variable
RoE Return on equity = net income/shareholders' equity
Independent variables
Firm size Firm size =natural log of book value of total asset = Ln (total assets)
Debt ratio Debt ratio=total liabilities/total assets
R&D expenditures Research and development expenditures per employee
=R&D expenditures/employee numbers
Tables
proc import out=A1datafile="D:\SAS\data.xls"dbms=excel replace;getnames=yes;
proc reg data=A1;model RoE=RD Size DebtRatio;run;