The data set Invest1993 on the textbook website contains data on 1962 U.S. firms extracted from Compustat, assembled by Bronwyn Hall, and used in Hall and Hall (1993).

The variables we use in this exercise are in the table below. The flow variables are annual sums. The stock variables are beginning of year.

year year of the observation I inva Investment to Capital Ratio Q vala TotalMarket Value to Asset Ratio (Tobin’s Q)
C cfa Cash Flow to Asset Ratio D debta Long TermDebt to Asset Ratio

(a) Extract the sub-sample of observations for 1987. There should be 1028 observations. Estimate a linear regression of I (investment to capital ratio) on the other variables. Calculate appropriate standard errors.

(b) Calculate asymptotic confidence intervals for the coefficients.

(c) This regression is related to Tobin’s q theory of investment, which suggests that investment should be predicted solely by Q (Tobin’s Q). This theory predicts that the coefficient on Q should be positive and the others should be zero. Test the joint hypothesis that the coefficients on cash flow (C) and debt (D) are zero. Test the hypothesis that the coefficient on Q is zero. Are the results consistent with the predictions of the theory?

(d) Now try a nonlinear (quadratic) specification. Regress I onQ, C, D,Q2, C2, D2,Q£C,Q£D, C £D.
Test the joint hypothesis that the six interaction and quadratic coefficients are zero.