"Newbies"

Humor

Themes & Topics

Glossary

Lecture Notes

Trivia & Factoids

Window Dressing By Money Managers

Issue

Money managers, in general, have failed to exert pressure on corporate managers to act in the best interest of shareholders.

Background

The objective of a manager is to undertake projects that are expected to maximize the wealth of the company’s shareholders as reflected in its stock price. Moreover, a well designed compensation package for corporate managers should be aimed at aligning the interests of the mangers (agents) with those of the shareholders (principal). Executive stock options are such an instrument, whereby managers would be rewarded only if the result of their effort is a considerable appreciation in the company’s stock price. Thus, if managers don’t perform well, then their company’s stock price would not appreciate, rendering the value of their stock options worthless.

Analysis

"Money managers are busy this week cleaning up their portfolios -- selling losers, shaving smaller positions and showcasing outperforming stocks. The window dressing is in high gear because Friday marks the final trading day for the first half of the year, a crucial date for managers to be reviewed by institutions, pension officers and other fund investors." (WSJ, June 26, 1996)

 Another technique used is that ‘[i]f there are winners in the quarter that [a money manager] didn't own specifically, he may go out and buy a small position so he can show to his shareholders in his shareholder report, 'Hey, we had Intel, for instance, in the quarter’,' James Poyner, technology analyst for Oppenheimer, told CNNfn. (June 26, 1996)

 In principal, money mangers can discipline corporate executives by dumping their stocks. Theoretically, this would depress the stock price, which would, in turn, put pressure on the executives’ performance rewards. The end result is actually worse. Window dressing by money managers can actually encourage mangers to engage in activities for short-term gains as opposed to long-term. In effect, corporate executives would be window-dressing their own corporate performance.