MOC Assignment

The Objective of this assignment is to revise the learnt concepts of econometrics and get you prepare
for exams.

You are provided with the financial data of textile industries of PSX listed companies. The textile industry
is subdivided, as per PSX classification, in three groups namely textile composite, textile spinning, and
textile waving.

Load the excel data to eviews (ignore the first row, don’t copy as its for your understanding of variables).
In this data we are considering our depended variable to be leverage (capital structure), and
independent variables firm size, firm performance as ROA, and asset tangibility (physical form of assets
ratio to total assets).

Once you have loaded your data to E-views

Requirement 1: try running following simple regressions;

1. Lev i ,t =β 0+ β1 Firm¿ ¿ i ,t +ε i ,t ¿
2. Lev i ,t =β 0+ β1 ROA i ,t + ε i ,t
3. Lev i ,t =β 0+ β1 Astangi , t +ε i , t

In each of the above simple regression, check if your regression of autocorrelation (independence of
error terms) is violated or not, you can check it through Durbin-Watson stat or the resid graph. If
autocorrelation exists then add a term ar(1) at the end of your estimate re run the regression, and
recheck for autocorrelation.

Interpret your result what do you understand from the results.

Requirement 2: try running following multiple linear regressions;

1. Lev i ,t =β 0+ β1 Firm¿ ¿ i ,t + ROA i ,t + ε i ,t ¿

2. Lev i ,t =β 0+ β1 Firm¿ ¿ i ,t + ROA i ,t + Astang i ,t + ε i ,t ¿

Check for autocorrelation and adjust your estimate, interpret your regression results which among the
above independent variable(s) explains the independent variable well.

3. Repeat the above regression 1 and 2 and apply Fixed effect regression to check the cross-section
difference on intercept of the estimate.

Requirement 3: Finding outlier and adjusting data

Open the leverage series in Eviews and check the dot plot graph, hover your mouse on the data points
which you see far away from the data group to identify the firm with outlier data. Once you have
identified the outlier firm data, delete that firm data in excel and reload the data to Eviews and rerun
the above regression in Requirement 1 and 2.
Do you notice any difference in the previous and current results, comment.

Requirement 4: Using categorical or dummy variable of industrial group.

1. Lev i ,t =β 0+ β1 Firm¿ ¿ i ,t + β 3 TC + β 4 TS+ε i ,t ¿

2. Lev i ,t =β 0+ β1 Firm¿ ¿ i ,t + β 2 TC + β 3 TS+ β 4 Firm ¿ TC + β 4 Firm ¿TS ε i ,t ¿
3. Lev i ,t =β 0+ β1 ROA i ,t + β 2 TC + β 3 TS+ ε i , t
4. Lev i ,t =β 0+ β1 ROA i ,t + β 2 TC + β 3 TS+ β 4 ROA ×TC+ β5 ROA × TS+ ε i ,t

In the above regressions you are required to test the hypothesis that the intercept of Textile composite,
Textile spinning, and Textile waving industry is same or not (eq 1 and 3). Also test if the slope of each of
the industry group is different from each other or same (eq 2 and 4).