Managerial Economics 2nd Edition by William Boyes

Exercise 5

The following type of report occurs each quarter as firms announce their earnings: Weaker-than-expected results last week from Exxon Mobil have set a gloomy backcloth for results on Thursday from Royal Dutch/Shell. A consensus of Wall Street analysts polled by Thomson Financial/ First Call had projected ChevronTexaco would report earnings of 70 cents per share. However, the company said that after excluding special items and merger-related expenses in both periods, operating earnings were $931 million (88 cents). Using that math, the company beat the analysts' figure by 18 cents. The company said it lost $154 million in the first quarter, compared with the yearago quarter, in refining, marketing, and transportation operations. The company said its profit margins in that sector were at their lowest levels since the mid-1990s. Chevron stock closed up 90 cents, to $85.90, yesterday on the New York Stock Exchange.
a. Why does the stock market react to earnings reports?
b. What do the earnings reports mean?