Question

Below is a simplified version of a model developed to investigate the impact of stock

splits on long-run stock performance for acquiring firms:
y = Bo+ Bıx1+B2x2 + B3x1x2
Where: y = average salary; x1 = {1, if stock split prior to acquisition, 0 if not } x2 = {1 if
firm's discretionary accrual is high, 0 if discretionary accrual is low.
A) In terms of the B's in the model, what is the mean buy-out-and-hold return rate (BAR)
for a firm with no stock split and a high discretionary accrual?
B) In terms of the B's in the model, what is the mean buy-out-and-hold return rate (BAR)
for a firm with no stock split and a low discretionary accrual?
C) For firms with no stock split, find the difference between the mean BAR for firms
with high and low DA. (Hint: Use your answers to parts a and b).
D) For firms with a stock split, find the difference between the mean BAR for firms with
high and low DA. (Hint: Use your answers to parts a and b)

Answer 1

(a).When

x1 = 0, x2 = 1

y = b0 + b2

(b).x1 = 0 , x2 = 0

y= b0

(c). Difference = (b0 + b2) - b0 = b2

(d). when stock split

x1 = 1

Hence difference = (b0 + b1 + b2 + b3) - (b0 + b1)

= (b2 + b3)