Question: The issues regarding executive compensation have received extensive media attention

The issues regarding executive compensation have received extensive media attention. The government is even considering a cap on high-lying salaries for executives (New York Times, February 9, 2009). Consider a regression model that links executive compensation with the total assets of the firm and the firm’s industry.
Dummy variables are used to represent four industries:
Manufacturing Technology d1, Manufacturing Other d2, Financial Services d3 and Nonfinancial Services d4. A portion of the data for the 455 highest-paid CEOs in 2006 is given in the accompanying table; the entire data set, labeled Industry_Compensatfon, can be found on the text website.

a. Estimate the model: y = β0 + β1x + β2d1 + β3d2 + β4d3 + , where y and x denote compensation and total assets, respectively. Here the reference category is nonfinancial services industry.
b. Interpret the estimated coefficients.
c. Use a 5% level of significance to determine which industries, relative to the nonfinancial services industry, have a different executive compensation.
d. Reformulate the model to determine, at the 5% significance level, if compensation is higher in Manufacturing Other than in Manufacturing Technology. Your model must account for assets and all industrytypes.

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  • CreatedJanuary 28, 2015
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