Interaction Term Interpretation
Message posted by Matthew (via 161.142.100.85) on November 30, 2001 at 8:57 AM (ET)

Dear Experts
I posted this question in other fourms before but get zero help from them.

I have some difficulties in the interaction term interpreation, I wish I can get some helps from you.
I fitted the following regression

Y=f(constant,X1,X2,X3)

where Y=transparency of the firm
X1=Profit (positive significant)
X2=Firm Size (positive significant)
X3=X1 times X2 (negative significant)

My interpretation of the interaction term is as the follow:
Firm that is large but making little profit, it is not transparent
Firm that is small but making large profit, it is also not transparent.
Is my interpreation to X3 correct or not? If not, how should I explain it.

Thank you for your time in advance

Sincerely,
Matthew

READERS RESPOND:
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Re: Interaction Term Interpretation
Message posted by Darius (via 200.23.217.10) on November 30, 2001 at 10:55 AM (ET)

>Y=f(constant,X1,X2,X3)

>where Y=transparency of the firm
>X1=Profit (positive significant)
>X2=Firm Size (positive significant)
>X3=X1 times X2 (negative significant)

>interpretation of the interaction term is as the follow:
>Firm that is large but making little profit, it is not transparent
>Firm that is small but making large profit, it is also not transparent.
>Is my interpreation to X3 correct or not? If not, how should I explain it.

I don愒 know the weight of each term (I suppouse the weight of X3 will be very small), but if you increase X1 or X2 will make at some point the term X3 do the results to behave as a parabolic curve: going up, next reaching a maximum value and then going down.

So Depending where you are in the curve (going up or down):

going up: an increase of X1 or X2 will make more "transparent" the firm
going down: an increase of X1 or X2 will make less "transparent" the firm.

I hope this may help.