Investment banks often have conflicting roles. They

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Investment banks often have conflicting roles. They [#permalink]

12 Jul 2007, 09:26

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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. Analyses 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

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12 Jul 2007, 11:49

I think I would go for answer B for this one.

The question asks which practice if used would hinder the long-term success, the biased opinion will do.

A is out of scope.
D is 180
C and E, I don't know how to explain those. I just don't like those.

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12 Jul 2007, 12:44

A.

If managers solely engaged in raising capital are the ones determining the analysts' rewards, then the analysts' reports will always be favorable and thus always be biased.

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12 Jul 2007, 12:47

plaguerabbit wrote:

A.

If managers solely engaged in raising capital are the ones determining the analysts' rewards, then the analysts' reports will always be favorable and thus always be biased.

This is A.

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12 Jul 2007, 13:20

Quote:

"Analyses of companies’ financial health need to be unbiased if an investment bank is to achieve long-term success.

my vote is for A.

The last statement tells you what is needed to achieve long-term success. The question asks what practices, if followed, would hinder long-tern success.

Unbiased analysis = long term success
Biased analysis = hinder long term success

[#permalink] 12 Jul 2007, 13:20

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Investment banks often have conflicting roles. They

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