Statistical model: A simultaneous regression model on managerial ownership and financial performance

The model below is interactive and you may click any of its symbols for definitions, hypothesis explanation and test results from regressions on 8523 firms listed on stock exchanges in the US. The model originates from a PhD dissertation by H, Mathiesen that was defended and approved September 2002. Get dissertation.

Click here for an exhibition on causality analysis and model identification.

 

   Equation 1 of 3: Financial performance
  

   Equation 2 of 3: Managerial ownership
  

   Equation 3 of 3: Expected financial performance
  

   where

          is financial performance at time t for firm i measured by either the market-to-book ratio or return on assets.

           is managerial ownership in percentage at time t in firm i for the piecewise linear interval d. The applied intervals are: [0;0.5%], [0.5;1%], [1;5%], [5;30%], and [30;100%]. OWi,t  is non-piecewise managerial ownership so that .

           is financial performance at time t+1 as expected at time t in firm i.

           is the natural logarithm of the salary of the top 2 highest paid managers measured in $ at time t in firm i for the piecewise linear interval c.

         Other variable abbreviations: MarkCap is market capitalization. BETA is stock market beta risk. CapExp is capital expenditures. PPECap is total property, plant and equipment. OpeInc is operating income. Sales is simply revenue on sales. LTDebt is long-term debt. Assets is total assets. R&D is research and development costs. DR&D is a dummy for missing R&D values. Adver is marketing or advertising costs. DAdver is a dummy for missing advertising values. DSAL is a dummy for missing salary values. DIndust1 and DIndust2 are industry dummies. DExchange is a stock exchange dummy. DIncorp is a dummy for country of incorporation.

         ax,y  are model parameters to be estimated by regression techniques.

         e1,i , e2,i , and e3,i  are the residual errors for each equation and each firm i.


 

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