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## Statistics

Questions -

Question 1 - Briefly explain what each of the following theories says about corporate cash holdings:

• Information asymmetry.
• The agency costs of debt.
• Managerial agency theory.
• The financing hierarchy model (also known as the pecking order model)
 Compustat Code Description GVKEY Global Company Key ACT Current assets-total AQC Acquisitions AT Assets-total BKVLPS Book value per share CAPX Capital expenditure CH Cash DLC Debt in current liabilities-total DLTT Long-term debt-total DP Depreciation and amortization DVC Dividends common/ordinary EBIT Earnings before interest and taxes LCT Current liabilities-total SALE Sales/turnover (Net) TXT Income taxes-total XRD Research and development expense PRCC_F Price close-annual-fiscal Table I: Description of the data in Assignment Data.xlsx.

Question 2 - Table II provides the construction rules for the variables you will use to test the competing explanations for corporate cash holdings. You should verify that the variable definitions there agree substantially with those in Table 1 of Opler et al. (1999). Now, construct the variables described in Table II, and present their summary statistics in the same format as Table 1 in Opler et al. (1999). You will not require the variables Dividend dummy, Truncated cash/assets, Payout to shareholders or Industry sigma for this analysis, so they should not appear in your table of summary statistics.

 Variable in Opler et al. (1999) Construction Rule Cash/assets CH/AT Real size ln(AT) Market-to-book ratio PRCC F/BKVLPS R&D/sales XRD/SALE Cash flow/assets (EBIT-DP-TXT-DVC)/AT Net working capital/assets (ACT-LCT-CH)/AT Capital expenditures/assets CAPX/AT Acquisitions/assets AQC/AT Total leverage (DLC+DLTT)/AT Dividend dummy If DVC > 0 then 1 else 0 Table II: Construction of the variables used by Opler et al. (1999).

Question 3 - Use the variables described in Table II to replicate the regression tests documented in Table 4 of Opler et al. (1999). In detail, you should run a multivariable OLS regression, with the natural logarithm of Cash/assets as the dependent variable and the remaining variables in Table II as the independent variables. You do not need Industry sigma and Regulation dummy in your regressions.

Run OLS regressions. You should then construct a table that reports the regression coefficients and associated t-statistics for each independent variable. Discuss the following statements by Opler et al. (1999), with reference to the first column in their Table 4, and assess them in the light of your own results:

(a) "We find that cash holdings decrease significantly with size, net working capital, leverage, whether a firm pays dividends . . . . Cash holdings increase significantly with the cash flow-to-assets ratio, the capital expenditures-to-assets ratio, . . . and the R&D-to-sales ratio."

(b) ". . . the coefficients of the market-to-book, cash flow-to-assets, and the dividend dummy variables are consistent with the static tradeoff theory, as well as with the financing hierarchy model." (Your answer should explain what the tradeoff theory and the financing hierarchy model say about the signs of coefficients of the market- to-book, cash flow and dividend dummy variables.)

(c) "However, the coefficients of the size, capital expenditures, and R&D variables are more consistent with the static tradeoff theory than with the financing hierarchy model." (Your answer should explain what the tradeoff theory and the financing hierarchy model say about the signs of the coefficients of the size, capital expenditure and R&D variables.)

(d) "It is not clear that the financing hierarchy model has predictions for the sign of working capital . . . . The coefficients of these variables are consistent with the static tradeoff theory." (Your answer should explain what the tradeoff theory says about the sign of the coefficient of the working capital variable.)

References -

Hillier, D., M. Grinblatt, and S. Titman (2012). Financial Markets and Corporate Strategy (second European ed.). Maidenhead, Berkshire: McGraw-Hill Education.

Opler, T., L. Pinkowitz, R. Stulz, and R. Williamson (1999). The determinants and implications of corporate cash holdings. J. Finan. Econ. 52 (1), 3-46.

Attachment:- Assignment Files.rar

Applied Statistics, Statistics

• Category:- Applied Statistics
• Reference No.:- M93121358

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