Stock market investors give considerable attention to firms quarterly earnings announces- mint, in which the firm releases its quarterly accounting earnings. Suppose we are interested in estimating a model to measure the stock markets response to the information contained in the earnings announcement. We settle on the following model

Where:

Ri - The percentage change in the stock price of company i in a short time-period (24 hours) around the time of the earnings announcement

Si - The earnings "surprise," measured as the deviation of the firms accounting earnings from the average expectations of Wall Street analysts. This is measured in cents per share of stock outstanding

LOSSi - A dummy variable that is 1 if firm I had negative accounting earnings (a loss) and is 0 otherwise

Beati ,- a dummy variable that is 1 if firm i had accounting earnings in excess of the average expectations of Wall Street analysts (i.e. Si is positive), and is zero otherwise.

Ii ^B = A dummy variable that is 1 if fire is in industry B, and is zero otherwise

Ii ^C = A dummy variable that is 1 if firm i is in industry C, and is zero otherwise

Ii ^D = dummy variable that is 1 if firm i is in industry D, and is zero otherwise

All firms in the sample are in either industry A, B, C, or D

Estimation of this model yields the following fitted regression line

(a) What is the reference category for this regression?

(b) What is the effect Ri of moving for industry A TO industry B, all else held equal?

(c) What is the effect on Ri of moving for industry C to industry D, all else held equal?

(d) Defend the new variable called Ii A, which is 1 if firm I is in industry A, and is zero otherwise. Using the variable and the other variable defends above, write down a regression that would fall into the dummy variable trip.