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This paper addresses issues left unanswered from prior published research showing that fourth-quarter earnings exhibit higher forecast errors. It offers an explanation for these findings and presents evidence to support this explanation. Unlike prior research, the market's reaction to fourth-quarter earnings as compared to that of the other three quarters is documented using a metric designed to capture both the size and sign of the forecast error. Our analysis indicates that there is a differential market reaction to earnings surprises over alternative quarters. Large negative unexpected earnings in the fourth quarter are associated with a smaller negative adjustment in stock returns as compared to all other quarters. Such an adjustment agrees with the explanation developed here for the higher forecast errors in the fourth quarter. These results do not support previous research that found counter-intuitive results concerning the relationship between earnings surprises and stock market returns for the fourth quarter.

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