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# Investment banks often have conflicting roles. They

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Intern
Joined: 25 May 2014
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Re: Investment banks often have conflicting roles. They [#permalink]

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01 Sep 2015, 11:40
Hi All

B is wrong because it is nowhere stated in the argument that the analyst send biased report. They are sending the unfavorable report which is something different than biased.
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Re: Investment banks often have conflicting roles. They [#permalink]

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03 Sep 2015, 21:34
I'm not economist and used POE, imho BCDE can provide some success, but A not

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

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16 Oct 2015, 19:25
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

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

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05 Apr 2016, 03:40
1
KUDOS
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

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

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20 Apr 2016, 07:13
what question type is this? paradox?
Intern
Joined: 14 Jul 2014
Posts: 15
Re: Investment banks often have conflicting roles. They [#permalink]

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02 Jun 2016, 08:23
This is a tough one. I still don't really understand the passage, let alone the answer choices. Would someone please do me a favor in rephrase the passage?
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Re: Investment banks often have conflicting roles. They [#permalink]

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10 Jul 2016, 11:44
definitely A. I almost fell into the trap answer B however for different reasons. I overlooked the word 'hinder' and for answer choice A this would mean the report is in conflict with the interest of raising money which is not what banks want!
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Re: Investment banks often have conflicting roles. They [#permalink]

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11 Jul 2016, 04:33
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

Statement : For long term success, analysis has to be unbiased [rest everything is background info]

So to find something that is weakening: we must find a bias

a) if manager is solely engaged in raising capital.... the report will try to raise as much capital as possible. So there's a bias (hold on)
b) We have already been told that analysts send unfavorable reports. So out
c) This will also lead to multiple streams, thereby reducing the chance of conflicts
d) Impartial
e) We are talking about impartiality and not success.

So from the options, only A stands as a clear chance of bias
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Re: Investment banks often have conflicting roles. They [#permalink]

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24 Aug 2016, 15:57
Hello from the GMAT Club VerbalBot!

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

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09 Sep 2016, 07:49
A doest not guarantee that the Managers would not be biased to award analysts who could send innacurate reports about financial health of a company just in order to raise more capital. I think that's the main reason for this strategy would hinder the Bank to meet its objectives.
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Re: Investment banks often have conflicting roles. They [#permalink]

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24 Sep 2016, 14:25
mikemcgarry Abhishek009 chetan2u
Can anyone of you please explain the problem with choice B. This question has given me a lot of hard time. I understand why A is correct but I do not understand why B is incorrect.
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Re: Investment banks often have conflicting roles. They [#permalink]

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24 Sep 2016, 15:53
Can anyone of you please explain the problem with choice B. This question has given me a lot of hard time. I understand why A is correct but I do not understand why B is incorrect.[/quote]

I understand that the reports actually are accurate and if clients continues to use them the business would not be at Risk, but in OA, instead, this new practice would put the business at risk since reports could be biased since analysts would be awarded by managers who are solely interested in raising money. . I'm not sure if it was clear enough.
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Re: Investment banks often have conflicting roles. They [#permalink]

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25 Sep 2016, 00:41
1
KUDOS
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....
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Re: Investment banks often have conflicting roles. They [#permalink]

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25 Sep 2016, 06:21
I feel like am missing a basic link, I did't understand how unfavorable reports regarding companies for whom they are raising capital will benefit any their client companies? if no benefit, why is this bank doing it? wouldn't it be counter productive ? In my opinion, the idea of generating unfavorable reports will hinder Bank's future growth.

Also, more importantly what's unfavorable mean? does it mean Objective?
if company is doing good the reports will be favourable. If the company is doing bad the reports will be unfavourable. In the passage the analysts are giving unfavorable reports means, can we assume that the companies are doing bad? I didn't get how any of this is related to option A. Sadly
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Re: Investment banks often have conflicting roles. They [#permalink]

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29 Sep 2016, 05:08
its A

Rest all are strengthening except A
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Re: Investment banks often have conflicting roles. They [#permalink]

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25 Oct 2016, 10:34
Abhishek009 wrote:
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....

Hi Abhishek009,

Just to play devil's advocate: In option E, we have :

Monitoring the success or failure of analysts’ current predictions about how companies will perform financially, in order to determine the value of future predictions

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

So, If i use my previous reports/predictions to estimate the current valuation and then prepare the report, won't the report be biased as well?
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Re: Investment banks often have conflicting roles. They [#permalink]

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31 Oct 2016, 06:56
Eliminating the confusion between A and B.
The question is asking about the long term progress of the IB in that case if the analyst are encouraged to do or are rewarded for process that is solely motivated for profit making then it will be detrimental for the long term success of the IB.

B just talks about the current process with no reference to the future.
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Re: Investment banks often have conflicting roles. They [#permalink]

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03 May 2017, 23:01
Unable to reason which option is correct A or B?
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Re: Investment banks often have conflicting roles. They [#permalink]

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08 May 2017, 12:19
3
KUDOS
Expert's post
Top Contributor
Quote:
Unable to reason which option is correct A or B?

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.
Quote:
B. Using reports by the investment bank’s analysts to determine how best to raise capital for a client

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.
Quote:
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

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

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27 Sep 2017, 11:44
I think the point of confusion is that "sometimes analyst send the UNFAVORABLE reports to potential investors" and from this point the statement jumps to what is good for Bank in long run.
So if those analysts sometimes send unfavorable reports, does not mean that sending those unfavorable reports is bad in long run for the bank.
But if the managers who are only interested in raising money for the companies, whose condition is actually unfavorable, stop those analysts from sending the actual(unfavorable report) and just want to encourage(reward) analysts to send only favorable(not so good for bank in long run)reports to potential investors then this action is definitely not good for the bank. which is what statement A says.

The important point here is to not get biased with the word unfavorable reports, cause by sending those unfavorable reports those analysts might be doing good for the bank.

But all this happens only Sometimes, which does not mean clearly how often? so this point of confusion might be rare too. But the bank does need its analysts' reports most of the time to determine the best way to raise money. Hence following B does not really hinders the bank from long term success.

Is this explanation ok??
Re: Investment banks often have conflicting roles. They   [#permalink] 27 Sep 2017, 11:44

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