Earnings reports move markets because they supply concrete information that changes investors' expectations about future cash flows and risk. Eugene F. Fama University of Chicago showed that markets tend to incorporate public information into prices quickly, so a quarter that is stronger or weaker than expected can trigger immediate revaluation. For workers, suppliers and local economies tied to a firm the swing in market value is not abstract; a sharp drop can make credit more costly for a community and raise uncertainty for households whose retirement accounts hold the shares. Earnings matter to corporate managers as well because stock responses affect compensation, acquisition currency and access to capital.
Why earnings matter
The primary cause of price reactions is the gap between reported results and the consensus forecast that investors and analysts build beforehand. S. P. Kothari MIT Sloan and other accounting researchers have documented that unexpected earnings explain a substantial share of short-term abnormal returns, while additional causes include management guidance revisions, one-time accounting items and the tone of accompanying disclosures. Market structure amplifies effects when high-frequency trading and algorithmic models translate surprising numbers into rapid, volume-heavy trades, and when disclosure practices differ across territories causing uneven investor confidence.
Market mechanics and investor behavior
Behavioral forces shape the magnitude and persistence of moves. Brad M. Barber University of California, Berkeley and Terrance Odean University of California, Berkeley have shown that retail investors often chase attention and can overreact to headline surprises, creating momentum that later corrects. The consequence is elevated volatility around release windows, higher trading costs and occasional mispricings that create opportunities for longer-term, value-oriented investors. At the societal level, regular, transparent reporting supports efficient capital allocation, while opaque disclosures in certain markets tend to concentrate wealth and raise the cost of capital for smaller firms.
Taken together, earnings reports act as scheduled pulses of information that update beliefs, reprice risk and reshuffle capital across sectors and regions. The interaction of rigorous accounting, market microstructure and human behavior determines whether a report causes a temporary blip or a durable reassessment of value, with tangible effects for communities, corporate strategies and the broader economy.
