Introduction

You are hired by Thomason Food company to perform an audit on the management's investment decision for year 2023. Based on economic theories, you expect that total assets, cash balance, sales growth %, loss indicator (=1 if net income is negative, otherwise 0), and CFO change indicator (=1 if CFO is changed, otherwise 0) may associate with management's decision on investment. To predict a reasonable investment amount, your team collect all peer companies' data and plan to conduct a regression analysis.

The collected peer companies' investment data is available on Classes (Homework section, "HW 3" folder). Your team has performed the necessary steps in data preparation and cleaning and has confirmed the data completeness and integrity.

Please build a linear regression model and answer the following questions:

1. Based on your audit objective, please indicate the independent variables and dependent variable.
2. Please provide the results of the regression model and interpret significance F, R², and P-values.
3. Please indicate which variable is positively associated with investment and which variable is negatively associated with investment. Is there any coefficient inconsistent with your intuition/expectation?
4. Please identify the top 5 peer companies that may underinvest, and indicate whether their absolute value of standard residual is greater than 2.
5. In 2023, Thomason Food Company has total assets of $6,690,000, a cash balance of $1,875,000, sales growth of -5% (-0.05), a loss indicator of 1, and a CFO change indicator of 0. If the manager decides to invest $125,000, will she/he overinvest or underinvest? Based on the threshold of $30,000, do you need to conduct further investigation, and why? (Note: use three decimal places for the coefficients to calculate your prediction).