Question

Consider an equation to explain salaries of CEOs in terms of annual firm sales, return on equity (roe, in percent form), and return on the firm's stock (row, in percent form): log(salary) = β0+ β1 log(sales) + β2roe + β3ros + u In terms of model parameters, state the null hypothesis that, after controlling for sales and roe, ros has no effect on CEO salary. State the alternative that better stock market performance increases

Answer 1

The null hypothesis states that after controlling for sales and roe, ros has no effect on CEO salary. The alternative hypothesis suggests that better stock market performance increases CEO salary.

Step-by-step explanation:

The null hypothesis in this case is that after controlling for sales and return on equity (roe), return on the firm's stock (ros) has no effect on CEO salary. Thus, the null hypothesis is that β3 = 0. The alternative hypothesis is that better stock market performance, indicated by a higher return on the firm's stock, increases CEO salary. This is represented by the alternative hypothesis β3 > 0.