Consider the following relationship between the annual salary (salary) in thousand of dollars of CEO Show more Consider the following relationship between the annual salary (salary) in thousand of dollars of CEOs and a measure of their performance indicated by the average return on equity (roe) in percentage terms (this is net income of the firm as a percentage of common equity) salaryi = B0 +Bi * roei + ui This is a cross-section data set on the above variables: CEO roe (%) salary (thousand of $) 1 14.1 1095 2 23.5 1122 3 13.8 1368 4 16.4 1078 5 10.5 1237 6 25.9 567 7 14.8 1339 8 56.3 2011 You need to do the necessary calculations by hand with the help of a calculator at most. We want to see your calculations. Follow the working format that will be shown in class. Do not use Eviews yet but you could check whether your answers are right by running the OLS procedure in Eviews. i. Estimate the relationship between salary and roe using OLS; that is obtain the intercept and the slope estimates in the equation salaryi = ^B0 + ^Bi * roei + ^ui Comment on the direction of the relationship. What is the meaning of the intercept? How much higher is the salary predicted to be if the roe increases by 2%? ii. Compute the fitted values and residuals for each observation and verify that the residuals (approximately) sum to zero. iii. What is the predicted value of salary when roe is 18%? Show less

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