Consider an equation to explain salaries of CEOS in terms of annual firm sales, return on equity (roe, inpercentage form), and return on the firm's stock (ros, in percentage form):log(salary) = Bo + Bilog(sales) + Bzroe + B;ros + u.(i) In terms of the model parameters, state the null hypothesis that, after controlling for sales androe, ros has no effect on CEO salary. State the alternative that better stock market performanceincreases a CEO's salary.(ii) Using the data in CEOSAL1, the following equation was obtained by OLS:log (salary) = 4.32 + .280 log(sales) + .0174 roe + .00024 ros(.32) (.035)(.0041)(.00054)n = 209, R2 = .283.By what percentage is salary predicted to increase if ros increases by 50 points? Does ros havea practically large effect on salary?(iii) Test the null hypothesis that ros has no effect on salary against the alternative that ros has apositive effect. Cary out the test at the 10% significance level.(iv) Would you include ros in a final model explaining CEO compensation in terms of firm perfor-mance? Explain.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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