A study was conducted to identify accounting choice variables that influence a manager's decision to change the level of the deferred tax asset allowance at the firm. Data were collected for a sample of 329 firms that reported deferred tax assets in 2000. The dependent variable of interest (DTVA) is measured as the change in the deferred tax asset valuation allowance divided by the deferred tax asset. The independent variables used as predictors of DTVA are listed as follows:
· LEVERAGE: x1=ratio of debt book value to shareholder's equity
· BONUS: x2=1 if firm maintains a management bonus plan, 0 if not
· MVALUE: x3=market value of common stock
· BBATH: x4=1 if operating earnings negative and lower than last year, 0 if not
· EARN: x5=change in operating earnings divided by total assets
A multiple linear regression model was fit to the data with the following results (p-values in parentheses):
y-hat = .044 + .006x1 − .035x2 − .001x3 + .296x4 + .010x5
(.070) (.228) (.047) (.678) (.001) (.869)
a. Interpret the estimate of the β coefficient for x2.
b. Write down the regression equation for a firm whose operating earnings is negative and lower than last year (BBATH=1)
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