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Answer: Company 1.
## Explanation In the earnings persistence regression model Earnings_{t+1} = α + β₁ × Earnings_t + ε: - **β₁ coefficient** measures earnings persistence - how much current earnings carry forward to future earnings - Higher β₁ values indicate higher earnings persistence **Analysis of the companies:** - Company 1: β₁ = 0.8 (highest) - Company 2: β₁ = 0.6 - Company 3: β₁ = 0.4 (lowest) **Conclusion:** Company 1 has the highest β₁ coefficient (0.8), indicating the strongest earnings persistence among the three companies.
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Earnings_{t+1} = α + β₁ × Earnings_t + ε. The analyst determines the following parameters:
| Company | α | β₁ |
|---|---|---|
| Company 1 | 0.4 | 0.8 |
| Company 2 | 0.5 | 0.6 |
| Company 3 | 0.3 | 0.4 |
The company showing the highest earnings persistence is most likely:
A
Company 1.
B
Company 2.
C
Company 3.