What is Window Dressing?
Window dressing is a term that describes the act of making a company's performance, particularly its financial statements, look attractive.
How Does Window Dressing Work?
Let's assume Company XYZ wants to look attractive to potential acquirers. It might do some window dressing by announcing much higher sales projections, obtaining and holding a lot of cash, or making other announcements that are likely to raise the stock price, even if only for a short time. The objective is to make a favorable impression on potential acquirers.
Companies are not the only ones to engage in window dressing. Mutual funds do it as well, often by cutting their losses and buying high-fliers (sometimes that are not even in the fund's investment sector) near the end of a reporting period.
Why Does Window Dressing Matter?
Window dressing is an attention-getting maneuver that can venture into unethical or illegal territory. At a minimum, the practice is generally looked upon unfavorably (after all, everyone has experienced the feeling of realizing that something isn't quite what it's cracked up to be). Nonetheless, when done carefully, window dressing can pay off by attracting customers, lenders, or investors.
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