Description
The purpose of this project is for you to acquire hands-on experience with the regression and the application of the tool as you write a professional report on a real-world problem. Becoming skilled at using this tool will greatly help you in your studies at the Business School.
Micro and macroeconomic factors affect the performance of a firm. Microeconomic factors exist within the firm and under the control of management; they include product, organizational culture, leadership, production quality and factors of supply (Broadstock et., 2011; Adidu and Olanye, 2006). However, macroeconomic factors exist outside of the company and not under the control of management; they include environment, political conditions, suppliers, competitors, government regulations (Adidu and Olanye, 2006).
The purpose of this project is for you to explore the interrelationship between macroeconomic factors, firm characteristics and financial performance of firms given to you. Specifically, you need to investigate how macroeconomic factors (such as GDP growth rate, interest rate, inflation rate, unemployment rates, crude oil prices…) affect the firm characteristics (such as size, leverage, ROA, stock returns…).
Model Specification example;
Leverage = ƒ (Macro-economic factors, firm characteristics)
Stock Return = ƒ (Macro-economic factors, P/E ratio, size, Book-to-Market ratio)
Macroeconomic factors are interested (main) variables but you need to add firm characteristics as a control variable because we know that several firm characteristics also affect firm leverage.
Definition:
Definition of your dependent and independent variables. For example, the dependent variable might be a stock return for company A and independent variables interest rate, unemployment rate and GDP growth rate. You need explain your variables.
Data collection; firm characteristics are given but you need to calculate several variables (ROA, leverage, ROE etc.) and if you need additional macroeconomic variables, you can use St Louis FED website to collect macroeconomic data. Below is the link;
Data Analysis:
The standard project is to use multiple regression analysis to analyze a data set that is given to you.
Analyze the data collected, using the following steps:
- Based on your prior knowledge or common sense, which independent variable do you think will be the best predictor of the dependent variable? Which variable is the second-best predictor? The third best?
- Apply appropriate empirical methods to identify the relationship between your dependent variable and independent variables. Do the results agree with your a-priori reasoning?
- Use the same empirical method for all three firm and compare your results.
Writing a Report:
Assume that you work for a company or work as a consultant for a client company that needs to have this data and write a report. There is no page limitation, type-written, double-spaced, and font (times new roman) size of 12.
Specifically, your report should contain the following:
- Abstract: A one-paragraph summary of what you set out to learn, and what you ended up finding. It should summarize the entire report.
- Introduction: A discussion of what questions you are interested in. (Hint: your dependent variable and independent variables and your expectations about the relationship between dependent and independent variables)
- Data Set: Describe details the variables that you use and create in the data set.
- Analysis: Describe how you used multiple regressions to analyze the data set. Specifically, you should provide summary statistics, correlation table, and regression results.
- Results: Provide inferences about the questions of interest and discussion. Interpret your results and discuss them.
- Conclusion: what are possible applications of the regressions that you developed?