Fundamentals Annual

ln this assignment you are asked to replicate selected and slightly modified parts of the article “Playing it safe? Managerial preferences, risk, and agency conflicts” by Gormley and Matsa, Journal of Financial Economics, 2016 (in the following referred to as ‘GM”).
For this assignment you will need to use data from four databases:
• Compustat North America – Fundamentals Annual (to construct the main sample of firms and the key variables such as state of incorporation., state of location, and financial variables) • Compustat North America – Fundamentals Quarterly to construct the cash flow volatility measure) • CRSP daily stock file (to compute stock return volatility as well as a dummy indicating performance- exit)., and • Table A.1 of Gormley and Matsa (2 016)
Start from the entire universe of Compustat firms from 1976-2006. You can use the Compustat variable state for state of location and the Compustat variable ire corp for the state of incorporation, i.e. you do not need to use data from Cohen (2012) as in the original article. Use the quarterly Compustat data to compute the cash flow volatility measure, and merge the data into the main file. Use daily CRSP stock return data to compute stock return volatility and an indicator for whether the firm suffered a performance- exit, and merge the data into the main file. Code the key independent variable, the dummy BC using the Table A.1 in the article. This is an indicator variable taking the value of one if, for a given observation, the state in which the firm is incorporated has passed a BC law by year t, and zero otherwise.
Questions:

1. Provide a table equivalent to GM’s Table 1, except that you omit the two rows on acquisition outcomes, but add two rows for the variables Ln(‘Cash) and Performance- exit. Briefly summarize the results and compare them to those of GM. Do you roughly match the numbers in the Table? 2. Replicate Table 2 of GM. 3. Run the following regression:
   1-13
   Yuist
   PT ai Sit
   for two different dependent variables, stock volatility and performance- exit. In this regression, cri are firm fixed effects and It are state-by-year fixed effects. Report the coefficients in a table (two columns for

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