FINANCE Corporate financial policy and R and D Management

must be obtained, then a plane of best fit estimated. Given an estimate of

the future level of personal disposable income and interest rates, one can

make a forecast of car sales. Regression capabilities are found in a wide

variety of software packages and hence are available to anyone with a

computer. We use the Statistical Analysis System (SAS) in this text.

In simple regression analysis, one seeks to measure the statistical asso-

ciation between two variables, Xand Y. Regression analysis is generally

used to measure how changes in the independent variable, X, influence

changes in the dependent variable, Y. Regression analysis shows a statisti-

cal association or correlation among variables, rather than a causal rela-

tionship among variables.

Simple linear least squares regression is a reasonable tool to use in the

forecasting of sales. Least squares regression assumes that the past is the

proxy for the future—that the sales of the firm in the future will be deter-

mined by the same variables and magnitudes of the variables’ influence as

those that have determined the sales of the past. When one uses regression

analysis, one seeks to examine the statistical association between two vari-

ables, so one may forecast using the regression analysis only if the associa-

tion remains reasonably stable. This is an assumption which, if violated,

70 AN INTRODUCTION TO STATISTICAL ANALYSIS AND SIMULTANEOUS EQUATIONS

FIGURE 5.1 Fitting the Regression Line

Intercept

Capital
Expenditures
Slope =

Rise

Run

GNP