Chapter 14.9, Problem 14.51ACB

Company donations to charity. Refer to the Journal of Management Accounting Research (Vol. 27. 2015) investigation of the link between the amount a company donates to a charity and the financial inflexibility of the firm, Exercise 12.62 (p. 725). Recall that the researchers measured financial inflexibility as the ratio of restricted assets to total firm assets, then fit the quadratic model,

E (Y_t) = β₀ + β₁X_t−1+ β₂(X_t−1)²

where Y_t = natural logarithm of total donations to charity by a firm in year t and X_t−1 = ratio of restricted assets to the firm’s total assets in year t − L [Note: This model is a simplified version of the actual model fit by the researchers.]

a. The researchers were concerned about potential first-order autocorrelation in the regression errors. Consequently, they conducted a test for positive first-order autocorrelation (one similar to the Durbin-Watson test). Give the null and alternative hypotheses for this test.

b. The p-value for the autocorrelation test was reported as p-value< .0001. What conc1us1on can the researchers draw from this test? How should they proceed?