Summarize the Sample Selection, data and descriptive statistics 3. Sample Select

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Summarize the Sample Selection, data and descriptive statistics

3. Sample Selection, Data, and Descriptive Statistics We obtain financial data from the 1997 Compustat Annual Industrial and Annual Research files for the period 1972-1997. For each year t from 1972 to 1992, we retain all observations with non-missing data for the following CapEx, is capital expenditures, Compustat data #128 R&D; is research and development expense, data #46, with a zero reported amount not treated as a missing value, AdvExt is advertising expenditures, data #45, with a zero reported amount not treated as a missing value, MV is the market value of equity, measured as the natural logarithm of the product of the fiscal-year closing price and common shares outstanding [log(data #199*data #54), Leverage, is the sum of long-term debt, data #9, and debt in current liabilities, data #34. divided by the sum of long-term debt and the market value of equity E, is primary earnings per share before extraordinary items and discontinued operations, data #58 P is share price, data #199, and BVE is the stockholders' equity, data #216, divided by the number of common shares outstanding, and we exclude negative BE firms when BE is used as the deflator. For all the variables except P and BVE, the values are for fiscal year t or at the end of fiscal year t. In contrast, P and BVE are measured at the end of fiscal year t 1 because they are used as deflators. Per share values of P, BVE, and future earnings, Et to Et+5, are adjusted for stock splits and stock dividends using the cumulative adjustment factor, Compustat data #27, so that they are comparable to the per share values of the remaining variables for year t Since earnings variability is calculated using data for five years following year t, the last year of the sample period is 1992. The earliest year is set at 1972 because prior to that year relatively few firms on Compustat report information on R&D; outlays Even though earnings variability is calculated using five years of future earnings data, to avoid survivor bias, we do not require earnings data availability for years to+5 for a firm-year to be included in the data. As described in the previous section, in cases where earnings data are missing in any of the periods from t 1 through t +5, the standard deviation of earnings, SD(Et+1.t+5) is set equal to the mean of SD(Et+1.1+5) for the firms in the same Altman Z-Score decile portfolio The sample-selection criteria yield a total of 55,073 firm-year observations when book value of equity is used as the deflator and 52,046 observations using price as the deflator The use of deflated variables mitigates heteroscedasticity in the regressions. Since no single deflator is likely to be perfect in controlling heteroscedasticity, we report results using both BVE and price as deflators. The results are robust to deflator choice The number of non-missing firm-year observations on advertising expense is lower at 42,776 using book value as the deflator and at 40,569 using price as the deflator. We report

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Summarize the Sample Selection, data and descriptive statistics

3. Sample Selection, Data, and Descriptive Statistics We obtain financial data from the 1997 Compustat Annual Industrial and Annual Research files for the period 1972-1997. For each year t from 1972 to 1992, we retain all observations with non-missing data for the following CapEx, is capital expenditures, Compustat data #128 R&D; is research and development expense, data #46, with a zero reported amount not treated as a missing value, AdvExt is advertising expenditures, data #45, with a zero reported amount not treated as a missing value, MV is the market value of equity, measured as the natural logarithm of the product of the fiscal-year closing price and common shares outstanding [log(data #199*data #54), Leverage, is the sum of long-term debt, data #9, and debt in current liabilities, data #34. divided by the sum of long-term debt and the market value of equity E, is primary earnings per share before extraordinary items and discontinued operations, data #58 P is share price, data #199, and BVE is the stockholders' equity, data #216, divided by the number of common shares outstanding, and we exclude negative BE firms when BE is used as the deflator. For all the variables except P and BVE, the values are for fiscal year t or at the end of fiscal year t. In contrast, P and BVE are measured at the end of fiscal year t 1 because they are used as deflators. Per share values of P, BVE, and future earnings, Et to Et+5, are adjusted for stock splits and stock dividends using the cumulative adjustment factor, Compustat data #27, so that they are comparable to the per share values of the remaining variables for year t Since earnings variability is calculated using data for five years following year t, the last year of the sample period is 1992. The earliest year is set at 1972 because prior to that year relatively few firms on Compustat report information on R&D; outlays Even though earnings variability is calculated using five years of future earnings data, to avoid survivor bias, we do not require earnings data availability for years to+5 for a firm-year to be included in the data. As described in the previous section, in cases where earnings data are missing in any of the periods from t 1 through t +5, the standard deviation of earnings, SD(Et+1.t+5) is set equal to the mean of SD(Et+1.1+5) for the firms in the same Altman Z-Score decile portfolio The sample-selection criteria yield a total of 55,073 firm-year observations when book value of equity is used as the deflator and 52,046 observations using price as the deflator The use of deflated variables mitigates heteroscedasticity in the regressions. Since no single deflator is likely to be perfect in controlling heteroscedasticity, we report results using both BVE and price as deflators. The results are robust to deflator choice The number of non-missing firm-year observations on advertising expense is lower at 42,776 using book value as the deflator and at 40,569 using price as the deflator. We report

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