Question

**Consider an equation to explain salaries of CEOs in
terms of annual firm sales, return on equity (roe, in percentage
points), and return on the firm’s stock (ros in percentage
points):**

**log(salary) = β0 + β1 log(sales) + β2roe + β3ros +
U.**

**Test the null hypothesis that roe has no effect on
salary against the alternative that roe has a positive effect
(after controlling for the other observables). Carry out the test
on the 10% significance level. (Help to get the critical value:
Φ−1(0.9) = 1.282, Φ−1(0.8) = 0.842, Φ−1(0.95) =
1.645.)**

**Would you include roe in a final model explaining CEO
compensation in terms of firm performance? Explain.**

Answer #1

1.Ho :
B_{3}= 0, H_{o} :
B_{3} = 0

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