This study investigates whether the market rewards (penalizes) firms for meeting (not meeting) analysts' earnings forecasts. Specifically, we examine the market response to positive and negative forecast errors. In addition, we examine whether the sensitivity of stock prices to positive or negative forecast errors is affected by the firms' history of consistently beating or missing analysts' forecasts. The results indicate that the earnings multiple applied to positive unexpected earnings is significantly greater than for negative unexpected earnings. In addition, we find that after controlling for the magnitude of the forecast error and bad news preannouncements, the market penalty for missing forecasts is significantly greater in absolute terms than the response to beating forecasts. We document evidence that, while the market recognizes and partially discounts the systematic component of positive analysts' forecast errors, a higher multiple is attached to the unsystematic component of unexpected earnings of firms that consistently beat analysts' forecasts. Overall, the evidence suggests that the increasing frequency of positive forecast errors as documented in previous research is a rational response by managers to market-related incentives.

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Prior research generally concludes that compensation committees completely shield executive compensation from the effect of restructuring charges on earnings. In contrast, we find that after controlling for the growth in annual inflation-adjusted CEO cash compensation, compensation committees only partially shield CEO compensation from the adverse effect of restructuring charges on earnings, on average. In further analyses, we identify factors associated with cross-sectional differences in the extent of shielding. Specifically, we find that compensation committees appear to: (1) completely shield initial and subsequent restructuring charges for CEOs with long tenure, provided that the firm had not recorded a charge in the two immediately prior years; (2) provide no shielding of subsequent restructuring charges taken by short-tenured CEOs if the firm reported a prior restructuring charge within two years of the current charge; (3) and partially shield the other categories of restructuring charges. Overall, this study provides evidence that compensation committees evaluate the context of each restructuring in determining the extent to which they will intervene to shield executive compensation from the effect of these charges.

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