project 1


General Instructions:


0 You can work in groups of NO MORE than 3.


0 Log in to WRDS (https://wrds-sol1.wharton.upenn.edu/) and go to CRSP à CRSP/Compustat Merged à Fundamentals Annual


0 Use the conditional statements to restrict observations to total assets (AT) greater than 10 and stock price (PRCC_F) greater than 5.


0 Download the data you need to answer the below questions, for all firms that meet this criteria from January 1980 to December 2016.



Questions to answer:


1. Create a table that shows the average (mean) book leverage and market leverage for all firms in each year from 1980 to 2016. Describe, in detail, the table and your interpretation of what the numbers mean. Have leverage ratios been stable over the last 36 years? What does this say about the various theories of leverage? Describe in 2-3 paragraphs.


2. Run a regression where the dependent variable is market leverage. Your independent variables should be the log of total assets, tangibility, profitability (net income/total assets), median industry leverage, and the firm’s market-to-book equity ratio. Define your variables in the following way:


a. Total assets = AT


b. Tangibility = ((INVT+PPENT)/AT)


c. Industry = use the first digit of a firm’s SIC code (SIC)


d. Median Industry Leverage = take the median value of market leverage over the entire sample for each industry (where Industry = first digit of SIC code)

e. Market-to-book ratio = (Market Value of Equity/ Book Value of Equity)


f. Market Value of Equity = CSHO * PRCC_F


g. Book Value of Equity = SEQ


3. Write up a 1-2 page report on your regression from #2. Your report should include:


a. Summary statistics for all the variables in your regression (N, mean, standard deviation)


b. A table with the regression output


c. A discussion of your interpretation of the regression output. Which variables are significant at the 5% level? What does this tell you about various theories of leverage?





Email me your Excel or SAS file and a printed copy of the write-up before the start of class. Clearly state the names of your group member in both the Excel/SAS file and the write-up.