"The Stock Market Is Shortsighted, That It Only Cares About The Next Quarter's Performance." Do You Agree Or Disagree With This Statement And Why?

1184 words - 5 pages

IntroductionFirst of all the initial basis of the question is difficult to test in regard to my organisation. I'm suggesting this as the organisation is entirely privately owned and managed, and further to compound this, by one family."Some companies are so small that their common stocks are not actively traded; they are owned by only a few people, usually the companies' managers. Such firms are said to be privately owned, or closely held, corporations, and their stock is called closely held stock," [1]However I will try to use my organisation and address the questions as read.Managerial PerformanceManagerial incentives or more likely for my organisation, to build personal reputation could also lead to myopic behaviour for personal gain. The reason is that, in a setting in which the firm's optimal wage policy involves downward rigidity in wages, [2] the manager has an incentive to move his wage up as high as he can in the next period. When shareholders base managerial wages on the organisations cash flow, the manager is induced to aim at producing high cash flows relatively early.Of course, he will likely be doing this at the expense of more distant cash flows, but he knows that once his wage moves up, it will not fall below the level it has moved up to, well that's the theory! That is, the manager essentially has an option on his human capital, and this leads to "myopia" (from the shareholders' standpoint). [3]With regard to my organisation the issues of managers being concerned with their own personal performance or wage enhancement opposed to the welfare of the organisation is again possibly however a little irrelevant if we consider the above as a small percentage or abnormal case. I suggest this as unlike some where an opportunity presents itself as stated, my organisation does not operate any form of bonus or financial incentive that would be paid by period which I believe would encourage managers to pursue their own goals.Unlike bondholders, shareholders have organisational information, that is, shareholders can dictate levels of risk to the manager, specifically relevant in my organisation, and so they can have them make decisions that are best for themselves the shareholders. Above I have mentioned bondholders, I have done this as the shareholder may have differing requirements as a bond has a face promise to pay where stock does not.It is clearly stated within our texts [1] page 392 and also footnote [9] of the same page where it states that a reason managers focus on short-term earnings and not stock prices is because the organisation pays managerial bonuses on the period earnings not on the stock prices, which may reflect in the future earnings which is further contrary to the shareholder preference of reinvesting earnings over and above the dividends so to theoretically raise stock value and increase the long dividends.I do however believe that this would and does in many organisations lead to managers focusing on their own personal...

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