# Regression analysis can be used to test whether the market efficiently uses information in valuing stocks. For

## Question:

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

(i) Using the data in RETURN.RAW, the following equation was estimated:

Test whether the explanatory variables are jointly significant at the 5% level. Is any explanatory variable individually significant?

(ii) Now, reestimate the model using the log form for netinc and salary:

Do any of your conclusions from part (i) change?

(iii) In this sample, 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.

(iv) Overall, is the evidence for predictability of stock returns strong or weak?

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**Related Book For**

## Introductory Econometrics A Modern Approach

**ISBN:** 978-0324660548

4th edition

**Authors:** Jeffrey M. Wooldridge