A fundamental accounting question is whether investors perceive low risk when earnings are smooth relative to the volatility of operating cash flows. We conduct two experiments to examine this question. Absent additional information concerning the likelihood of earnings management, our first experiment finds that investors give managers the benefit of the doubt and perceive low risk when earnings are relatively smooth. Given this finding, our second experiment examines whether additional information that supports investors' suspicions of earnings management affects investors' risk judgments when earnings are relatively smooth. We find that investors no longer give managers the benefit of the doubt when additional information suggests that managers have either the opportunity or the incentive to report smooth earnings. Our study provides important insights to the literature concerning both “whether” and “when” relatively smooth earnings affect investors' risk judgments. Data Availability: Contact the authors.

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We provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm's historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators.

We provide new evidence on individual analysts' differential abilities to forecast firm value. We find that independent analysts' target prices perform well in predicting future price relative to investment-bank analysts. Our evidence suggests that, 12 months after their issuance, independent analysts' target prices are more likely to be met than those issued by investment-bank analysts in general and are more accurate than the target prices of affiliated investment-bank analysts, controlling for analyst characteristics. We also find that independent analysts' target prices are more likely to be met for firms with higher stock price momentum. In contrast, we find that the association between realized returns and the returns predicted by target prices does not differ for independent vs. investment-bank analysts. Moreover, independent analysts' target prices are less likely to be met and are less accurate for firms with higher volatility. Our evidence contrasts with prior literature which generally concludes that independent analysts' research is of lower quality. Yet, the market appears to react relatively less strongly to independent analysts' target price revisions. Our findings suggest that investors and researchers can benefit from understanding the properties of independent analysts' target prices, particularly for certain types of firms.

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