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...

Research suggests that investors fail to fully process changes in return on assets due to their incomplete processing of changes in asset turnover. We propose that investors do not fully process changes in return on assets—stemming from changes in asset turnover—because of their (1) fixation...