x97agarwal wrote:
Investment banks often have conflicting roles. They sometimes act for a client company by raising capital from other investment institutions as advantageously as possible, but their analysts also sometimes send unfavorable reports on the financial health of companies for whom they are raising capital to other clients who wish to make investments. Analysis of companies’ financial health need to be unbiased if an investment bank is to achieve long-term success.
If the statements above are true, which of the following practices, if adopted by an investment bank, would hinder its long-term success?
A. Evaluating and rewarding the bank’s analysts on the basis of recommendations made by managers who are solely engaged in raising capital for clients
B. Using reports by the investment bank’s analysts to determine how best to raise capital for a client
C. Sharing the task of raising capital for a client with other investment banks
D. Ensuring that conflicts between analysts and those who raise capital for clients are carefully mediated and resolved by impartial arbitrators
E. Monitoring the success or failure of analysts’ current predictions about how companies will perform financially, in order to determine the value of future predictions
A good question I will say...
Check the highlighted part/Conclusion of the stimulus.
The author states an unbiased opinion will help an investment bank to achieve long-term success. |
Now, what is the role of Investment Bankers ?
Quote:
1. They sometimes act for a client company by raising capital from other investment institutions.
2. Their analysts sometimes send unfavorable reports on the financial health of companies for whom they are raising capital to other clients who wish to make investments.
Now, observe there is a relationship in the 2 sentences above....
Quote:
Investment Bank's analyst publish report ( Favourable/Unfavourable)----------->Other investment institutions invest based on those report
So, U see the Investment Bank has 2 roles -
1. Analysts Publishing reports
2. Raising Capital from other Institutions willing to invest
And the conclusion is - Analyst's report must be unbiased from the Institution Raising Investment Capital for Long Term success of the Firm The question asks what will hinder the Long term Success of the firm ?Don't look at any answer and pre think now (
eGMAT strategy), the answer will definitely be -
If the Investment firm carries out the existing procedure of producing biased opinion.Check Option (A)
Evaluating and rewarding the bank’s analysts on the basis of
recommendations made by managers who are solely engaged in raising capital for clients The highlighted part represents the Biased opinion of Analysts , which the conclusion warrants...Option (B)
Using reports by the investment bank’s analysts to determine how best to raise capital for a client
This option suggests that reports are still being published by analysts , but check this option is not as string as option (A) , which states that the managers are themselves solely engaged in raising capital for clients ( Which must produce biased opinion).
This option can be viewed differently - Investment Bankers / Other investors are using reports from investment bank’s analysts , particularly from a team which is not directly involved in the process of raising Investment capital for whom they are publishing the report.
If Team A is involved in raising Investment Capital , then Team B publishes the Report - This this can be an Unbiased report and hence will not hinder the long the success of the Investment Bank.
Hence IMHO (A)PS :
Keats Please feel free to revert in case of any doubt , will love to provide my views....