Liquidity: Considerations of a Portfolio Manager

This paper examines liquidity and how it affects the behavior of portfolio managers, who account for a significant portion of trading in many assets. We define an asset to be perfectly liquid if a portfolio manager can trade the quantity she desires when she desires at a price not worse than the uninformed expected value. A portfolio manager is limited by both what she needs to attain and the ease with which she can attain it, making her sensitive to three dimensions of liquidity: price, timing, and quantity. Deviations from perfect liquidity in any of these dimensions impose shadow costs on the portfolio manager. By focusing on the trade-off between sacrificing on price and quantity instead of the canonical price-time trade-off, the model yields several novel empirical implications. Understanding a portfolio manager's liquidity considerations provides important insights into the liquidity of many assets and asset classes.     

Welcome aboard (but don't change a thing)

Cheryl Hailstrom, the CEO of Lakeland Wonders, a manufacturer of high-quality wooden toys, is the first person outside the Swensen family to hold the top job. But she's not a stranger to this 94-year-old company: She'd been the COO of one of its largest customers and had worked with Lakeland to develop many best-selling products. Wally Swensen IV, the previous CEO, chose Cheryl because she knew how to generate profits and because he believed her energy and enthusiasm could take the company to the next level. Yet here she is, nearing her six-month anniversary, wondering why her expansive vision for the company isn't taking hold. She's tried to lead by example: traveling a pounding schedule to visit customers, setting aggressive project deadlines, and proposing a bonus schedule. She has a plan to reach the board's growth goals--going beyond Lakeland's core upscale market and launching into the midmarket with an exclusive toy contract with a new customer. The problem is that while Cheryl's senior managers are giving her the nod on the surface, they're all really dragging their feet. Some fear that offshore outsourcing will hurt their brand, not to mention make for tricky union negotiations. Others are balking at trying a new design firm. Is Cheryl pushing too much change too quickly? Should she bring in outsiders to speedily adopt the changes she envisions and overhaul Lakeland's corporate culture? Or should she keep trying to work with the current team? Commentators Kathleen Calcidise of Apple Retail Stores; executive coach Debra Benton; Dan Cohen, coauthor of The Heart of Change; and consultant Nina Aversano offer advice in this fictional case study.     

Fund Families as Delegated Monitors of Money Managers

Because a money manager learns more about her skill from hermanagement experience than outsiders can learn from her realizedreturns, she expects inefficiency in future contracts that conditionexclusively on realized returns. A fund family that learns whatthe manager learns can reduce this inefficiency cost if thefamily is large enough. The family’s incentive is to retainany given manager regardless of her skill but, when the familyhas enough managers, it adds value by boosting the credibilityof its retentions through the firing of others. As the numberof managers grows, the efficiency loss goes to zero.     

The strategic power of saying no

Susan Bishop started Bishop Partners with the aim of making it the best boutique executive-search firm in the business. Specializing in television, radio, and publishing industries, her plan was to beat out her larger, established competitors through superb execution. Great service would lead to happy clients, which would lead to more business, which would keep clients happy, which would lead to even more business. A virtuous circle, right? Wrong. Before long, she and her staff grew weary of jumping through every hoop their clients could think of--trying to find candidates for lower-level positions in remote locations at below-market rates, for instance. But what could they do? How could they afford to disappoint any customer when they didn't have that many to begin with? In this vivid first-person account, Bishop describes how she and her staff came to an answer that was highly counterintuitive: stop trying to make everyone happy. Focus instead on making the right customers happy. Raise their prices. Limit their searches to high level positions in their field of expertise. Stick to companies big enough to give them repeat business. As hard as it was to define the right clients, it was even harder to say no to the wrong clients. One member of the staff had to turn down work worth $120,000; Bishop herself had to turn down $250,000 from her largest client, Coca-Cola. But in the end, those clients came back with higher-quality work, and her company was on its way from chaotic little start-up to successful, professional enterprise. Bishop tells the classic entrepreneur's story, one with important lessons about strategy making, courage, and discipline for all businesspeople.     

Courage as a skill

A division vice president blows the whistle on corruption at the highest levels of his company. A young manager refuses to work on her boss's pet project because she fears it will discredit the organization. A CEO urges his board, despite push back from powerful, hostile members, to invest in environmentally sustainable technology. What is behind such high-risk, often courageous acts? Courage in business, the author has found, seldom resembles the heroic impulsiveness that sometimes surfaces in life-or-death situations. Rather, it is a special kind of calculated risk taking, learned and refined over time. Taking an intelligent gamble requires an understanding of what she calls the "courage calculation": six discrete decision-making processes that make success more likely while averting rash or unproductive behavior. These include setting attainable goals, tipping the power balance in your favor, weighing risks against benefits, and developing contingency plans. Goals may be organizational or personal. Tania Modic had both types in mind when, as a young bank manager, she overstepped her role by traveling to NewYork--on vacation time and on her own money--to revitalize some accounts that her senior colleagues had allowed to languish. Her high-risk maneuver benefited the bank and gained her a promotion. Lieutenant General Claudia J. Kennedy weighed the risks and benefits before deciding to report a fellow officer who had plagiarized a research paper at a professional army school. In her difficult courage calculation, loyalty to army standards proved stronger than the potential discomfort and embarrassment of "snitching" on a fellow officer. When the skills behind courageous decision making align with a personal, organizational, or societal philosophy, managers are empowered to make bold moves that lead to success for their companies and their careers.     

AGENCY CONFLICTS IN DELEGATED PORTFOLIO MANAGEMENT: EVIDENCE FROM NAMESAKE MUTUAL FUNDS

Namesake funds provide a unique sample for studying the two agency conflicts that exist within a mutual fund. The first is between the fund management company and fund shareholders, and the second is between the fund management company and the fund manager. A typical namesake fund manager sits on his or her fund's board, frequently as the chairman, is the majority owner of the fund management company, and has significant investments in the fund he or she manages. Our results indicate that namesake funds charge higher fees, suggesting that the boards of namesake funds are less effective. We find that namesake funds are more tax efficient, consistent with the idea that managerial ownership helps align the interests of managers with those of shareholders. Because of fewer career concerns, namesake fund managers herd less while assuming greater unsystematic risk. We find weak evidence that namesake fund managers outperform their benchmarks and peers. Finally, we observe that namesake funds attract higher levels of investor cash flow.     

Losing it

"It's worse than I thought.... She's completely lost her mind," says Harry Beecham, the CEO of blue chip management consultancy Pierce and Company. The perplexed executive was in a hotel suite with his wife in Amsterdam, the latest stop on his regular trek to dozens of Pierce offices worldwide. In his hand was a sheaf of paper--the same message sent over and over again by his star employee and protégée Katharina Waldburg. The end of the world is coming, she warned. "Someone is going to die." Harry wouldn't have expected this sort of behavior from Katharina. After graduating with distinction from Oxford, she made a name for herself by single-handedly building Pierce's organizational behavior practice. At 27, she's poised to become the youngest partner ever elected at the firm. But Harry can't ignore the faxes in his hand. Or the stream-of-consciousness e-mails Katharina's been sending to one of the directors in Pierce's Berlin office--mostly gibberish but potentially disastrous to Katharina's reputation if they ever got out. Harry also can't dismiss reports from Roland Fuoroli, manager of the Berlin office, of a vicious verbal exchange Katharina had with him, or of an "over the top" lunch date Katharina had with one of Pierce's clients in which she was explaining the alphabet's role in the creation of the universe. Harry is planning to talk to Katharina when he gets to Berlin. What should he say? And will it be too late? Four commentators offer their advice in this fictional case study. They are Kay Redfield Jamison, a professor of psychiatry and a coauthor of Manic-Depressive Illness; David E. Meen, a former director at McKinsey & Company; Norman Pearlstine, the editor in chief at Time Incorporated; and Richard Primus, an assistant law professor at the University of Michigan.     

Front-Running by Mutual Fund Managers: A Mixed Bag

This paper evaluates the welfare implications of front-running by mutual fund managers. It extends the model of Kyle (1985) to a situation in which the insider with fundamentals-information competes against an insider with trade-information and in which noise trading is endogenized. Noise traders are small investors trading through mutual funds to hedge non-tradable or illiquid assets. The insider with trade-information is one of the fund managers. We find that her front-running activity reduces the liquidity costs of her customers, but it also reduces their hedging benefits. As a result, the customers of the front-running manager may be worse off and place smaller orders. The opposite is true, however, for those investors who are not subject to front-running. In aggregate, front-running has either no or positive consequences for welfare.     

When consultants and clients clash

This fictitious case study explores the issues that surround the relationships between consultants and their clients, as well as the dynamics of a newly merged organization. Susan Barlow, a senior consultant with the Statler Group, dreaded her upcoming status meeting. She had thought it a lucky break when she got assigned to the Kellogg-Champion project. Royce Kellogg, the CEO of the newly merged firm, had engaged the Statler Group for what seemed a simple project: to reconcile the policies and practices of the two former firms now that they had become one. But once on the job, Barlow realized that the issues were much more complex than they had seemed. The new firm needed help badly-but not the kind of help that the client had led Barlow to believe it needed. What would she and Jim Roussos, her partner on the assignment, tell Kellogg at the meeting? Kellogg, for his part, was not looking forward to the status meeting, either. From his point of view, the consultants had caused more problems than they had solved. What's more, he wasn't even dealing with the consultants he had hired. Where was George Gray, the senior partner he had met with originally? Maybe Barlow and Roussos were just too young and inexperienced. Kellogg felt he was getting a raw deal. How would he approach them in the morning? Should he fire them or make an attempt at damage control? Two experts advise the consultants and two advise the client on how to handle the status meeting.     

Pension fund manager skills over the economic cycle: the (non-)specialization cost

We study whether pension fund managers, as professionals of important social and financial products, are able to add value for their clients and adapt to economic changes. To this end, we analyze the performance and skills (market timing and stock picking) over the economic cycle from both pension fund and manager perspectives. This double analysis allows examining whether skills reside in managers and/or funds and control for manager substitutions. Despite the long-term nature of pension funds, we find that both fund and manager skills vary with market conditions, showing better evidence of stock-picking in booms, and of market timing in recessions. Nonetheless, top (bottom) funds and managers exhibit both (incorrect) skills in booms and in recessions. Some of the top (bottom) funds and managers are the best (worst) in both abilities in the same periods, but not in different periods, showing that not all managers have the ability to adapt to market conditions. Additionally, managers with limited skills tend to specialize because diversification requires multi-task skills and the non-specialization of these managers usually results in incorrect skills.     

The purpose at the heart of management

To succeed, startup enterprises need both passion and good management. But entrepreneurs can be famous for their visionary ardor and still be lousy managers. Traditionally, the key to long-term growth is getting the company founder to step aside so professional management can take over. Sometimes, however, this means abandoning a company's greatest asset in order to improve its procedures. A better solution is for the entrepreneur to learn to manage. Kye Anderson had motivation to spare. When she was 13, her 47-year-old father suffered recurrent shortness of breath followed by a massive heart attack. For her, the result was a single-minded career in medical technology and the development of innovative systems for diagnosing heart-and-lung disease. She had the zeal and determination it took to sell her ideas to investors and doctors, found a company, and grow it. But then, on the grounds that she lacked the financial and managerial expertise to carry her business from exuberant adolescence to profitable maturity, she stepped aside. A year and a half later, Anderson came back. She picked new board members who could act as entrepreneurial mentors. She reasserted certain original core values such as the importance of R&D and the emphasis on the patient as the ultimate customer. She discarded business lines that had strayed too far afield, and she learned how and what to delegate. Most important of all, Anderson realized that a leader's greatest obligation is to preach, and she began to spend much of her time communicating with her own employees about the purpose, mission, values, and strategy that could carry the company into a billion-dollar primary-care market.     

Managerial Incentives for Short-term Results

Of late, concern has been expressed that American managers tend to make decisions that yield short-term gains at the expense of the long-term interests of the shareholders. In this paper, we have attempted to investigate managerial incentives for such decisions. We find that, when the manager has private information regarding his or her decisions, there exist situations wherein the manager has incentives to make decisions which yield short-term profits but are not in the stockholders best interests. This incentive for suboptimal decisions arises because the manager, by taking decisions yielding short-term profits, hopes to enhance his reputation earlier, thus boosting his wages. We also find that this incentive is inversely related to her experience, the duration of her contract, and the risk of the firm.     

The moonlighter

Jeremy Hicks, Zagante Systems' lead programmer, walks into the office at eight o'clock on a Sunday night and does a double take when he spots his boss, Melanie. She's equally surprised to find she isn't alone. Before leaving for the evening, Melanie pays Jeremy a visit, only to discover that he isn't hard at work on Zagante's new product--he's programming a game for another company. The next day over lunch, Melanie confronts Jeremy and lets him know that he needs to stay focused on Zagante's new software. Jeremy insists that he's fully engaged in it. So Melanie agrees to keep the moonlighting under wraps so long as it doesn't interfere with Jeremy's job. That night, Melanie sits down at her laptop and opens up a Google window. "Moonlighting," she types. Dismayed at the number of hits, she changes her search to "Fired for moonlighting." This search leads her to case after case, but none helps her with Jeremy. She tries one more time. "Promoted for moonlighting," she types. No surprise. Zero hits. Frustrated with Jeremy, yet anxious to keep such a talented employee, Melanie turns to Jill Darby, Zagante's HR director, for guidance. Jill has both good and bad news. The bad news is that the company has no moonlighting policy. The good news is that Jill can arrange for Jeremy to receive a low-interest loan. But when Melanie tells Jeremy about the loan, he doesn't go for it. He's not just freelancing for the money, it turns out; he's downright enjoying the work and doesn't appreciate his boss butting in to his private business. How should Melanie handle this moonlighting issue? Commentators Bill Jensen, author of Work 2.0: Rewriting the Contract; attorney Barry LePatner; economics professors Jean Kimmel and Karen Conway; and HR director Sandra Davis offer advice in this fictional case study.     

The Value of Mandatory Certification: A Real Effects Perspective

We study the real effects of certification to demonstrate the value of mandatory certification over and above mandatory disclosure in enhancing investment efficiency. In our model, a firm's manager selects a project to maximize the firm's short-term stock price, which is a function of her certification and disclosure decisions about the outcome of the project. Although the manager might be either forthcoming or strategic with regard to the disclosure of her private information, she can strategically choose whether to incur a cost or not to certify her disclosure, unless mandated. The manager always selects the first-best project when both certification and disclosure are mandatory. However, when certification is voluntary, project selection is inefficient. In addition, mandating disclosure without mandating certification can lead to lower investment efficiency than mandating neither. In justifying why mandatory certification is beneficial for public firms, our results offer a note of caution regarding the contemplated regulatory moves for increased disclosures by public firms without corresponding certification requirements, for example, the recent SEC proposal requiring extensive climate-related disclosure.     

Stop holding yourself back

After working with hundreds of leaders in a wide variety of organizations and in countries all over the globe, the authors found one very clear pattern: When it comes to meeting their leadership potential, many people unintentionally get in their own way. Five barriers in particular tend to keep promising managers from becoming exceptional leaders: People overemphasize personal goals, protect their public image, turn their competitors into two-dimensional enemies, go it alone instead of soliciting support and advice, and wait for permission to lead. Troy, a customer service manager, endangered his job and his company's reputation by focusing on protecting his position, not helping his team; when a trusted friend advised him to change his behavior, the results were striking. Anita's insistence on sticking to the tough personal she'd created for herself caused her to ignore the more intuitive part of the leadership equation, with disastrous results--until she let go of the need to appear invulnerable and reached out to another manager. Jon, a personal trainer who had virtually no experience with either youth development programs or urban life, opened a highly successful gym for inner-city kids at risk; he refused to be daunted by his lack of expertise and decided to simply "go for it." As these and other examples from the authors' research demonstrate, being a leader means making an active decision to lead. Only then will the workforce--and society--benefit from the enormous amount of talent currently sitting on the bench.     

Bob's meltdown

Annette Innella is just coming into the lunchroom at Concord Machines when Bob Dunn starts screaming at her. After throwing his lunch tray against the wall, he stomps out, leaving Annette stunned. Naturally, Annette, the new senior VP for knowledge management, is beside herself. She knows her proposal to establish a cross-functional knowledge management committee is progressive thinking for this oldline manufacturer, but Bob's reaction is totally over the line. If Bob stays, she goes--that's all there is to it. Bob is contrite, but he's under a lot of pressure. The general manager of the Services Group, he's just returned from a two-week trip around the globe to gear up his troops to beat revenue targets again, despite shrinking budgets and hiring freezes. And what does he see when he gets back? An e-mail from Annette requesting that two of his best people devote half their time to what he calls her "idiotic" Knowledge Protocols Group. He's carrying the company on his back, and she's throwing this nonsense at him. Graphics specialist Paula Chancellor is surprised. Sure, Bob's gruff, but his staff loves him, and he's the only one of the big shots who ever talks to her. But HR director Nathan Singer is incensed; Bob's never been a team player, Singer complains, and it's time he learned a lesson. CEO Jay Nguyen is in a bind. Bob is his top manager; he brings in all the money. And even though future revenues are going to have to come from somewhere else, Jay is not totally behind Annette's initiative in the current business climate. He can't afford to lose Bob. But if he reins in Annette, it will look like he's condoning Bob's outburst. What should he do? Four commentators offer advice in this fictional case study.     

Offsetting the implicit incentives: Benefits of benchmarking in money management

Money managers are rewarded for increasing the value of assets under management. This gives a manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. The misaligned incentives create potentially significant deviations of the manager’s policy from that desired by fund investors. In the context of a familiar continuous-time portfolio choice model, we demonstrate how a simple risk management practice that accounts for benchmarking can ameliorate the adverse effects of managerial incentives. Our results contrast with the conventional view that benchmarking a fund manager is not in the best interest of investors.     

Reporting Discretion and Private Information Communication through Earnings

We model a two-period pure exchange economy where a risk averse manager, who has private information regarding future earnings, is required to issue an earnings report to investors at the end of each period. While the manager is prohibited from directly disclosing her private information, she is allowed to bias reported earnings in the first period, subject to GAAP rules that require that a specified proportion of the bias be reversed subsequently. We show there is a minimum threshold of reversal, such that, when the proportion of required reversal is above this threshold, the manager smooths income and communicates her private information through reported earnings. Consequently, the market attaches greater weight to reported earnings than under a regime that allows no discretion. When the required reversal is below the minimum threshold, the manager increases reported earnings without limit and the equilibrium degenerates. When the manager is not endowed with any private information, the market unravels the "true" earnings and price is unaffected by earnings management. Our results underscore the importance of both allowing and restricting reporting discretion through formal mechanisms.     

The Importance of Mutual Understanding Between External Accountants and Owner–Managers of SMEs

This study investigates the perspective of the owner–manager of a small or medium‐sized enterprise (SME) on the importance of mutual understanding with an external accountant. Mutual understanding means that the owner–manager understands what the accountant is saying and feels understood by the accountant. The results, based on 310 completed surveys of Belgian owner–managers, show that owner–managers who have a high level of mutual understanding use the advice of their external accountant more extensively. This is in turn positively linked to the financial health of an SME. Furthermore, several drivers that enable the establishment of a high level of mutual understanding are explored. Owner–managers with a high level of mutual understanding consider their accountant as a strategic partner, experience a high level of proactive behaviour with them, have a higher frequency of formal contact, and perceive informal contact as important. External accountants should consider these opportunities in their client management and training of internal staff. Education of clients and openness also seem very important, as the level of a client's accounting knowledge, the number of accounting topics owner–managers deal with, and transparency towards the accountant are significantly positively related to mutual understanding.