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(35p) In this problem we will study how firms' investment responds to changes in their valuation. In particular, we will see how related investment and

(35p) In this problem we will study how firms' investment responds to changes in their valuation. In particular, we will see how related investment and "Tobin's Q" are using the dataset "q.dta".1 This is a panel dataset of investment by 188 US firms over 11 years 1975- 1985. The main variables we will be interested in studying are the broad investment to capital ratio ikb, and the broad Q qb. Q is the ratio of the market value of a firm's equity and liabilities to their book value. a) (10p) Start by running a nave regression. Regress ikb on qb. Interpret the sign and magnitude of the coefficient. Can you give this estimate a causal interpretation? In

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