Formulate a regression equation you would use to test for the differences in ROE between firms that used tier 1 investment banks as their advisors and those that used tier 2 or tier 3 banks (note: tier 2 and tier 3 banks are separate categories). Please define all variables you use in your regression equation.
Here's what I'm thinking.. not sure: ROE = a + b1(tier2) + b2(tier3), where tier2 and tier3 are dummy variables
Alternatively I'm considering the following: ROE = a +b1(tier1) + b2(tier2tier3), where tier2tier3 is set to 0 if the bank is neither part of tier 1 or tier 2
Could you please explain the logic behind the best answer? We also need to discuss the relationship between the coefficients (and their statistical significance) of these regressions and the t-tests for the differences in mean ROEs.
Thanks!
