The residuals in a regression equation measure the impact of firm-specific events.
Residuals = Actual y value - Predicted y value
Residual analysis is a helpful set of methods for assessing the quality of a fitted model. Checking the underlying assumptions is crucial because most linear regression estimators depend on independent errors with the same distribution and a correctly stated regression function in order to be consistent. Regression is a statistical technique used in finance, investing, and other fields that aim to ascertain the strength and nature of the relationship between a single dependent variable (often represented by Y) and a number of other factors (known as independent variables).
The residuals in a regression equation measure the impact of firm-specific events.
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