This paper explores the relationship between CEO incentive compensation and the resulting stock return sensitivities in response to firms` earnings announcements. I test theoretical predictions using Dow Jones Industrial data over the period from 1994 to 2001. I find that the stock return sensitivities to earnings announcement increase with the CEOs` incentive compensation as predicted by the model. In other words, stock returns are more sensitive to the higher CEO pay-performance ratios regardless of earnings categories. This implies that CEOs whose incentive compensation are high are more (less) likely to be involved in overstatement when the firm`s performance is bad (good). This finding suggests not only that there exist overstatements in firms` earnings announcements, but also that the market is rational enough to consider CEO`s incentive compensation in discounting reported earnings.