Investment banks often have conflicting roles. They sometimes act for

Question

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

GMATNinja · Accepted Answer

Start with the conclusion: "Analysis of companies’ financial health need to be unbiased if an investment bank is to achieve long-term success."

Now, we need to find a practice that, if adopted by an investment bank, would hinder its long-term success. In other words, we need to select a practice that would cause the investment bank's analysis of companies' financial health to be  biased , since that would hinder its long-term success.
 
The passage tells us that investment banks "sometimes act for a client company by raising capital from other investment institutions as advantageously as possible". Choice B simply describes one practice that the investment bank could use to determine how best to raise capital for a client. Certainly, the bank could use reports by its analysts to determine how best to raise capital for a client while simultaneously providing unbiased analyses of companies' financial health. This practice alone does not necessarily lead to bias.
 
If a manager is  solely  engaged in raising capital for clients, then that manager would certainly not want other clients wishing to make investments to see "unfavorable reports on the financial health of companies for whom they are raising capital." Those managers would only want the clients making investments to see favorable reports and would be more likely to give positive recommendations for analysts who send favorable reports. Because analysts want positive recommendations from those managers, the analysts would be more likely to send favorable reports. Thus, the analysis by those analysts would be biased, and, according to the author, this would hinder the bank's long-term success.

stopper5 · Answer

Clear A for me.

What hinders long-term success: Analysis of companies’ financial health need to be unbiased if an investment bank is to achieve long-term success

so if the analyst's opinion is biased, this will be detrimental to banks.

if managers from the capital raising side bias the opinions of analyst, this will not be good.

A states exactly that.

in B, the channel of flow is the other way. Managers in the capital raising side will be using the work of analysts and no indication of biased opinions of analysts is apparent here.

plaguerabbit · Answer

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.

misterJJ2u · Answer

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

nmohindru · Answer

Will go with A)

mejia401 · Answer

Evaluate question.

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  OK - Rewarding the bank's analyst would compromise the report's integrity; not rewarding the bank's analyst would ensure the report's integrity.

B. Using reports by the investment bank’s analysts to determine how best to raise capital for a client  Using the reports would allow for greater transparency than would hinder the bank's long-term success.

C. Sharing the task of raising capital for a client with other investment banks  Sharing the risk among banks would allow for long-term success and not hinder it.

D. Ensuring that conflicts between analysts and those who raise capital for clients are carefully mediated and resolved by impartial arbitrators  Ensuring conflict are carefully mediated would allow for long-term success and not hinder it.

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  Determining the value of predictions would allow for long-term success and not hinder it.

pinoygmat · Answer

I encountered this on my GMAT Prep Exam Pack 1 test. I nearly got this wrong. The trap is in the question: "If the statements above are true, which of the following practices,  if  adopted by an investment bank,  would hinder  its long-term success?"

Once you focus on the two bold words, everything becomes clear. It's only answer choice A.

So basically my takeaway in this question is to check if the answer choice clearly addresses the question before moving on. I mean any answer choice could be true, any answer choice could address the conclusion, but focus on what is being asked.

The guys in the GMAC know how our mind works. They know how susceptible our minds are to traps. Think like the test makers.

KUDOS pls!

Ekland · Answer

This is pretty straight forward but actually NOT, if you read the BUT proceeding ANALYSTS to mean UNFORTUNATELY or UNETHICALLY then it gets confusing.
If I had rightly seen that the BUT introduced the other also legit role that contrasts with the previous, then it would have been a sub600 level question.
A. cos analyst will become biased

Abhishek009 · Answer

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 ?

Now, observe there is a relationship in the 2 sentences above....

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....

anairamitch1804 · Answer

Unable to reason which option is correct A or B?

faltan · Answer

"... 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."

could anyone dissolve this clause? I'm confused with the subject. Who invest to who? reports for client companies and to which "other" clients?

GMATNinja · Answer

faltan , this clause is a bit of a mouthful! Let me try to clarify it in the context of the rest of the passage:

Clear enough, right? Don't worry, it gets worse...

This is the first "role" of an investment bank. In this part of the sentence, the investment bank is working  for  a  client company . Specifically, they are raising capital  as advantageously as possible.  On to the part that tripped you up:

Here we see the role played by investment banks that conflicts with the role defined in the first part of the sentence.  "Their analysts"  refer to the investment bank's analysts. What are these analysts doing? They're sending  unfavorable reports  about  client companies . The "client companies" are the same companies referred to in the first clause of the sentence.

Now, instead of working  for  these companies to advantageously raise capital, the analysts are working  against  them by sending unfavorable information. And to whom are they sending this information? To  "other clients who wish to make investments."  These are other clients  of the investment bank  who want to make an investment in the "client companies."

This is the heart of the conflict: on one hand, the investment banks want to raise capital for their "client companies." On the other hand, if one of their  other  clients wants to make an investment in their "client companies," they may have to send unfavorable reports and discourage the investment.

I hope this clears it up!

Leonaann · Answer

Could someone explain why option c is wrong?

wouldn't the sharing of information pose as a hindrance?

GMATNinja · Answer

Remember to tie the question back to the conclusion of the passage: "Analyses of companies’ financial health  need to be unbiased  if an investment bank is to achieve long-term success."

As you go through the answer choices, you are looking for a practice that  hinders long-term success . In the context of the conclusion, the bank's long-term success would be hindered if its analysis of client companies  is biased  in some way.

Let's apply this to answer choice (C):
 
The passage provides two conflicting roles of an investment bank. In one of those roles, the bank is raising capital for client companies "as advantageously as possible." Answer choice (C) could  lessen  that positive bias, because sharing the task with other banks makes it possible to avoid the bias that comes with relying on internal analysts. The possibility of avoiding bias is not a hindrance to long-term success, so (C) is out.

I hope that helps!

Will2020 · Answer

GMATNinja just to make sure, D goes the other way around right? I mean, D is an UNBIASED approach. Tks!

GMATNinja · Answer

Yes, you're exactly right! Resolving conflicts by using "impartial arbitrators" could prevent bias, which would not hinder the long-term success of the bank.

I hope that helps!

Taulark1 · Answer

egmat , I have a question here - Why would the investment bank send out unfavourable reports to some client who wants to invest. I don't understand the motivation behind this. . Thanks in advance!

egmat · Answer

Hey Taulark1 Thank you for the interesting question. I'm not an Investment Banker (LOL

) but I'm willing to make an educated guess, as is expected by the GMAT. It is logical to expect an Investment Bank to have several clients both for raising capital and for investing in companies. Therefore, it is likely that Investment Banks are routinely faced with situations wherein they have to raise the perception of one client company over that of another. Afterall, they cannot have everyone investing in just one (best) company, right? What would happen to the rest? So, this is a matter of sales, and different circumstances call for different sales strategies. And this is what introduces BIAS . If an analyst is trying to raise funds for client company A and not client company B , he would tell the prospective investors good things about A and bad things about B. This introduces an element of bias in the analyst's positive assessment of client company A's financial health. And vice versa. Now that we understand this, the logic behind choice A becomes apparent. If an investment bank were to take only the views of managers for whom the analysts helped raise funds, it would not have a fair assessment of either those companies' financial health, or that analyst's performance. And this would hinder the long term success of the investment bank, since eliminating BIAS is a necessary condition . I hope this helps. Happy Learning! Abhishek

Stanindaw · Answer

In option A wont we have to assume that manager is also involved in sending false financial health reports to some client.
Also is option B incorrect because it talks about other reports and not the Financial Health reports?

Investment banks often have conflicting roles. They sometimes act for

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Investment banks often have conflicting roles. They sometimes act for

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