I asked this question before, but in the wrong community (sorry):
I want to explain stock returns in a regression model. Besides regressing against my main explanatory variables, I want to control for at least the most common risk factors. In a paper (reference below), the authors state that they "[...] control for the firm’s factor loadings based on the Fama-French three-factor model [...]" (p. 13).
This sounds as if they include the factor loadings as explanatory variables in their regression. To me, this does not make sense and I guess, I interprete this wrong. I would be very thankful, if somebody could help me to clarify this. How exactly do they control for the firm's factor loadings? Do they include the factor returns, rather than the factor loadings, as explanatory variables?
Thank you very much in advance!
PS: This is the paper I am talking about:
Lins, Karl V., Henri Servaes, and Ane Tamayo. "Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis." The Journal of Finance (2017).