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;