1. Running the regression using certain programs E-view and SAS

2. Title and hypotheses How size, leverage and R&D expenditures affect firm earnings? Size-to-earning relationship –Ferri and Jones (1979) and Smith and Watts (1992) suggest that larger firms have easier access to capital markets and are able to borrow at more favorable interest rates. –Moreover, studies by Panzar and Willig (1979), Eckard (1990) and Paul (2001) address the effect of scale economies derived from firm size.

3. Debt-to-earnings relationship –Modigliani and Miller (1958), no consistent predictions have been reached of the relationship between profitability and leverage –Tax-based models suggest that profitable firms should borrow more, ceteris paribus, as they have greater needs to shield income from corporate tax. –Pecking order theory suggests firms will use retained earnings first as investment funds and then move to bonds and new equity only if necessary. In this case, the leverage-earnings relationship should be negative.

4. R&D-to-earnings relationship –Numerous empirical studies including Schoenecker and Swanson (2002); Healy et al. (2002); Ballester et al. (2003) and Monahan (2005) have showed the positive impact of R&D investment on firm earnings

5. Regression

6. Data Sample S&P500 firms over the 10-year period from 1996 to 2005 are analyzed. Financial firms are excluded from the sample because the nature of their liabilities and capital structure intrinsically differ from those of non- financial firms. The overall sample consists of a total of 212 firms and a total of 2,078 observations of annual financial data. All data are obtained from the Compustat database.

7. Proxy variables

25. proc import out=A1 datafile="D:\SAS\data.xls" dbms=excel replace; getnames=yes; proc reg data=A1; model RoE=RD Size DebtRatio; run;