Question: Astudy was undertaken to assess the relationship between a firm's level of leverage and the strength of its shareholders' rights. The authors found that firms with more restricted shareholder rights tended to use higher leverage: they assumed more debt. This empirical result is consistent with the theory of finance. The regression resulted in an intercept estimate of 0.118 and a slope estimate of 0.040. The t-statistic value was 2.62, and the sample size was 1,309.
1. Write the estimated regression equation predicting leverage (L) based on shareholder rights (R).
2. Carry out a statistical test for the existence of a linear relationship between the two variables.
3. The reported r2 value was 16.50%. Comment on the predictive power of the regression equation linking a firm's leverage with the strength of the rights of its shareholders.