Homework
Exercise 1
Question:
Data set CEOSAL2.RAW includes information about 177 CEOs, which can be used to explore the effect of corporate performance on the salary of CEOs. Check variable labels and know the meanings of the variables. Complete the following questions:
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Estimate the regression model of annual salary with sales volume and market value as independent variables in which constant elasticity of each variable is specified. Present the estimation result.
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If adding profits into the model in 1, could this variable be in logarithmic form? Do these corporate performance variables explain most of the variation in CEOs’ salaries?
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Based on 2, add ceoten into the model and keep other conditions the same. What is the estimated percentage return if CEO tenure increases by one year?
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Calculate the correlation coefficient between logarithmic market value and profits. Are they highly correlated? How it affects the OLS estimation?
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Use partial regression to calculate the elasticity of market value to CEO’s salary by using a single regression model.
Do.file document and results:
1. Import data : “CEOSAL2.DTA”
use "CEOSAL2.DTA", clear
2. Describe the variables to know meanings of them
describe
variable name | storage type | display format | variable label |
---|---|---|---|
salary | int | %9.0g | 1990 compensation, $1000s |
age | byte | %9.0g | in years |
college | byte | %9.0g | =1 if attended college |
grad | byte | %9.0g | =1 if attended graduate school |
comten | byte | %9.0g | years with company |
ceoten | byte | %9.0g | years as ceo with company |
sales | float | %9.0g | 1990 firm sales, millions |
profits | int | %9.0g | 1990 profits, millions |
mktval | float | %9.0g | market value, end 1990, mills. |
lsalary | float | %9.0g | log(salary) |
lsales | float | %9.0g | log(sales) |
lmktval | float | %9.0g | log(mktval) |
comtensq | int | %9.0g | comten^2 |
ceotensq | int | %9.0g | ceoten^2 |
profmarg | float | %9.0g | profits as % of sales |
e_lmktval | float | %9.0g | Residuals |
3. Answer to 1.1
l o g ( s a l a r y ) = β 0 + β 1 l o g ( s a l e s ) + β 2 l o g ( m k t v a l ) + u log(salary)=\beta_0+\beta_1log(sales)+\beta_2log(mktval)+u log(salary)=β0+β1log(sales)+β2log(mktval)+u
reg lsalary lsales lmktval
dis "log(salary)=" _b[_cons] "+" _b[lsales] "log(sales)+" _b[lmktval] "log(mktval)"
Source | SS | df | MS | |
---|---|---|---|---|
Model | 19.3365617 | 2 | 9.66828083 | Number of obs = 177 |
Residual | 45.3096514 | 174 | .260400295 | F(2, 174) = 37.13 |
Total | 64.6462131 | 176 | .367308029 | Prob > F = 0.0000 |
R-squared = 0.2991 | ||||
Adj R-squared = 0.2911 | ||||
Root MSE = .51029 |
lsalary | Coef. | Std. Err. | t | P>|t| | [95% Conf. Interval] |
---|---|---|---|---|---|
lsales | .1621283 | .0396703 | 4.09 | 0.000 | .0838315 .2404252 |
lmktval | .106708 | .050124 | 2.13 | 0.035 | .0077787 .2056372 |
_cons | 4.620917 | .2544083 | 18.16 | 0.000 | 4.118794 5.123041 |
l o g ( s a l a r y ) = 4.6209175 + . 16212831 l o g ( s a l e s ) + . 10670798 l o g ( m k t v a l ) log(salary)=4.6209175+.16212831log(sales)+.10670798log(mktval) log(salary)=4.6209175+.16212831log(sales)+.10670798log(mktval)
4. Answer to 1.2
First we need to know if it is appropriate to add profits into the model in 1 in logarithmic form.
sum profit
Variable | Obs | Mean | Std. Dev. | Min | Max |
---|---|---|---|---|---|
profits | 177 | 207.8305 | 404.4543 | -463 | 2700 |
We can see the minimum of profit is negative.
count if profit < 0
count if profit < 0 |
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9 |
We can see if we add profits into the model in 1 in logarithmic form, there will be nine missing value. Because there are nine negative observations in variable profit. Hence, we should not add profits into the model in 1 in logarithmic form, but in level form.
l o g ( s a l a r y ) = β 0 + β 1 l o g ( s a l e s ) + β 2 l o g ( m k t v a l ) + β 3 p r o f i t s + u log(salary)=\beta_0+\beta_1log(sales)+\beta_2log(mktval)+\beta_3profits+u log(salary)=β</