Model specification:

In this study, OLS model with fixed effect was taken into action. The diagnostics tests showed that the
fitted model was in line with the linear regression assumptions.
Assumptions:
1. The model is linear.
2. The mean of the residuals is zero:
The actual mean is
3. Homoscedasticity of residuals or equal variance
Figure 1:Regression Diagnostic plots

The two plots in Figure 1 ensure that there is little tress of heteroscedasticity in the model of fit. Results
from Breusch-Pagan test against heteroskedasticity is shown below:
studentized Breusch-Pagan test

data: fixed.dum
BP = 11.965, df = 13, p-value = 0.5305

The null hypothesis is that the residuals show homoscedasticity. So, the null hypothesis cannot be
rejected.
4. No autocorrelation of residuals
Because the autocorrelation in Figure 2 quickly becomes zero, there is no autocorrelation of the
residuals.
Figure 2: Autocorrelation function of the residuals

Results from Durbin-Watson test is shown below:

Durbin-Watson test

data: fixed.dum
DW = 2.5418, p-value = 0.2381

The null hypothesis is there is no autocorrelation and the null hypothesis cannot be rejected. So,
there is no autocorrelation among the residuals.
5. The independent variables and residuals are uncorrelated:
In Figure 3 only earning volatility shows some pattern. The results for pearson coefficients for
correlation are given below:
Test stat Pr(>|t|)
Size -2.440 0.059
Profitability -1.303 0.249
Liquidity -0.121 0.908
Tangibility 1.030 0.350
OperationalAbility 0.096 0.927
Growth -0.541 0.612
Tax -0.100 0.924
Earning.Volatility -1.895 0.117
Company.Name NA NA
Tukey test 0.527 0.598

The output above shows that none of the variables have significant correlation with the residuals.
Figure 3: Residual plots vs independent variables

9. Multicollinearity:
VIF value greater than 5; indicates that there is multicollinearity. So, this assumption is violated in
this model.

10. Normality of the residuals:

Figure 4 shows that the residuals are within the range to be called normal
Figure 4: Q-Q plot of the studentized residuals

In this study, OLS model with fixed effect is used to measure the impact of explanatory variables
on the dependent variable. The data used in this study is panel data by nature and this is intuitive
that there should be an impact of individual companies in this data, which is proved by the
following graphs:
So, there is heterogeneity across companies; but little time fixed effect to consider.

Regression Equation:

= 0 + 1 + 2 + 3 + 4
+ 5 + 6 + 7
+ 8 + 9 + 10 + 11
+ 12 + 13 +

i refers to individual firms and t refers to time period. Beacon, Beximco, Ibn, Renata, Square are
dummy variable for the individual companies in comparison to the first company Acme. The
following table shows the summary of the variables and hypothesis:

Table.