Empirical studies of consumer demand or of factor demand have now moved far beyond the Cobb-Douglas functional form and elasticities of interest are no longer estimated as parameters of the system. Instead, such elasticities are typically non-linear functions of the parameters that have been estimated and it is natural to want to be able to say something about the statistical properties of such elasticities. One way of dealing with this is to linearly approximate the elasticity formulas (in terms of the estimated parameters) and use classical statistical procedures to get approximations to the underlying variances. If y-f(x) and x has a variance covariance matrix V, the linear approximation is given by: Var(y) (8f/8x)V(8f/8x). The data needed for such an approximation are estimates of the parameters and of the associated variance-covariance matrix. Some of the earliest references that we have found to uses of this approximation technique in the elasticity context are to Griffin and Gregory (1976), Griffin (1977), and Fuss (1977), while the earliest references to

This study investigates the behavior of the components of the bid-ask spread around earnings announcements. The authors find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Their results suggest that the directional change in the total bid-ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid-ask spread, even when they result in increased information asymmetry.

This study investigates the behavior of the components of the bid‐ask spread around earnings announcements. We find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Our results suggest that the directional change in the total bid‐ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid‐ask spread, even when they result in increased information asymmetry.

Varouj A. Aivazian, Jeffrey L. Callen, Itzhak Krinsky, Clarence C. Y. Kwan, Mean-Variance Utility Functions and the Demand for Risky Assets: An Empirical Analysis Using Flexible Functional Forms, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 411-424

This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the proportion of firm shares held by institutional investors, a variable used by prior research to proxy for investor sophistication. Our findings show that the institutional holdings variable is negatively correlated with the observed post-announcement abnormal returns. Our findings also show that traditional proxies for transaction costs (i.e., trading volume, stock price) as well as firm size have little incremental power to explain post-announcement abnormal returns when institutional holdings is an explanatory variable. If institutional ownership is a valid proxy for investor sophistication, these findings suggest that the trading activity of unsophisticated investors underlies the predictability of stock returns after earnings announcements. However, tests evaluating the validity of institutional holdings as a proxy for investor sophistication yield only mixed results. This calls for caution in interpreting our findings.