c13     Use the data in CEOSAL2.RAW to answer this question.

 

(i)       Estimate the model

 

lsalary 5 b0 1 b1lsales 1 b2lmktval 1 b3ceoten 1 b4ceoten2 1 u

 

by OLS using all of the observations, where lsalary, lsales, and lmktvale are all natural logarithms. Report the results in the usual form with the usual OLS standard errors. (You may verify that the heteroskedasticity-robust standard errors are similar.)

 

(ii)      In the regression from part (i) obtain the studentized residuals; call these stri. How many studentized residuals are above 1.96 in absolute value? If the studentized re- siduals were independent draws from a standard normal distribution, about how many would you expect to be above two in absolute value with 177 draws?

 

(iii)    Reestimate the equation in part (i) by OLS using only the observations with |stri | ≤

 

1.  96. How do the coefficients compare with those in part (i)?

 

(iv)    Estimate the equation in part (i) by LAD, using all of the data. Is the estimate of b1 closer to the OLS estimate using the full sample or the restricted sample? What about for b3?

 

(v)     Evaluate the following statement: “Dropping outliers based on extreme values of

 

studentized residuals makes the resulting OLS estimates closer to the LAD estimates on the full sample.”