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# Investment banks often have conflicting roles. They

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Manager
Joined: 15 Jun 2007
Posts: 93
Investment banks often have conflicting roles. They [#permalink]

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12 Jul 2007, 09:26
4
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Difficulty:

75% (hard)

Question Stats:

57% (01:20) correct 43% (01:31) wrong based on 1788 sessions

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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
Senior Manager
Joined: 06 Mar 2006
Posts: 476

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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.
Manager
Joined: 12 Apr 2007
Posts: 161

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12 Jul 2007, 12:44
1
1
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.
Senior Manager
Joined: 29 Nov 2006
Posts: 311
Location: Orange County, CA

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12 Jul 2007, 13:20
3
1
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
Senior Manager
Joined: 23 May 2006
Posts: 306
Investment banks often have conflicting roles. They [#permalink]

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27 Jul 2008, 23:00
5
23
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
Senior Manager
Joined: 06 Apr 2008
Posts: 393

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28 Jul 2008, 01:51
2
4
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 For long term success these recommendations should be unbiased , but managers engaged in raising capital will bias the analyst's opinions in their favor so this will hinder long-term success
B. Using reports by the investment bank’s analysts to determine how best to raise capital for a client This will help long term success since reports will be unbiased.
C. Sharing the task of raising capital for a client with other investment banks Out of context
D. Ensuring that conflicts between analysts and those who raise capital for clients are carefully mediated and resolved by impartial arbitrators If analysts give unbiased reports then fine
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 out of context

Will go with A)
VP
Joined: 28 Dec 2005
Posts: 1485

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28 Jul 2008, 05:16
i had it down to A or B, and chose B ... i thought that using the analyst's reports constituted an unbiased point of view ?
VP
Joined: 17 Jun 2008
Posts: 1479

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28 Jul 2008, 05:32
2
I will go with C. This option will hinder long term growth.
Senior Manager
Joined: 10 Mar 2008
Posts: 333

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28 Jul 2008, 09:48
Close call between A and B. I'll go with B to be safe.

A - does not indicate that mangers will act unbaised or in the best interest of the client.
Current Student
Joined: 08 Oct 2007
Posts: 168
Location: Berkeley, CA
Schools: Berkeley-Haas MBA
WE 1: Investment Management (fund of funds)
WE 2: Private Equity (\$2bn generalist fund)

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28 Jul 2008, 10:05
10
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.
Director
Joined: 20 Sep 2006
Posts: 631

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28 Jul 2008, 10:21
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

IMO B, you should not mix and match the analysis. Do independent analysis for raising the capital and for clients intrested in investing
Manager
Status: #TeamFuqua
Joined: 01 Jun 2010
Posts: 122
Location: United States
Concentration: General Management, Strategy
GMAT 1: 580 Q37 V32
GMAT 2: 570 Q36 V32
GMAT 3: 680 Q44 V40
WE: Consulting (Consulting)
GMATPrep - Investment banks often have conflicting roles [#permalink]

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27 Oct 2013, 11:42
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

Any thoughts on how to parse the question and relate it to the answer options?
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Manager
Joined: 29 Apr 2013
Posts: 97
Location: India
Concentration: General Management, Strategy
GMAT Date: 11-06-2013
WE: Programming (Telecommunications)
Re: GMATPrep - Investment banks often have conflicting roles [#permalink]

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27 Oct 2013, 11:50
1
1
investment-banks-often-have-conflicting-roles-they-67971.html
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Collection of some good questions on Number System

Manager
Status: #TeamFuqua
Joined: 01 Jun 2010
Posts: 122
Location: United States
Concentration: General Management, Strategy
GMAT 1: 580 Q37 V32
GMAT 2: 570 Q36 V32
GMAT 3: 680 Q44 V40
WE: Consulting (Consulting)
Re: GMATPrep - Investment banks often have conflicting roles [#permalink]

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27 Oct 2013, 11:56
ah good! Thanks...hopefully this will bump it for people to retry ..
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Senior Manager
Joined: 15 Sep 2011
Posts: 345
Location: United States
WE: Corporate Finance (Manufacturing)
Re: Investment banks often have conflicting roles. They [#permalink]

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06 Feb 2014, 05:07
1
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.
Director
Joined: 03 Aug 2012
Posts: 829
Concentration: General Management, General Management
GMAT 1: 630 Q47 V29
GMAT 2: 680 Q50 V32
GPA: 3.7
WE: Information Technology (Investment Banking)
Re: Investment banks often have conflicting roles. They [#permalink]

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08 Jun 2014, 22:23
(A) and (B) are strong contenders.

But not convinced why (B) is rejected.

When we know that analysts are sending unfavorable reports, we know that on the basis of these reports only the bank will take a decision as to how best to raise a capital for a client. So, it would be erroneous to act on the basis of the reports sent by analysts since the reports are not genuine.

I know (A) is strong too since when you evaluate analysts based on recommendations of managers handling raising of capital. We can assume that the managers are corrupt and both the analysts and the managers are working against the success of the bank.
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Intern
Joined: 23 Aug 2013
Posts: 3
Struggling with Investment banks making a wrong decision [#permalink]

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31 Jul 2014, 07:09
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

I took following approach.

Structure:
IBs sometimes help companies raise capital and sometimes don't. If the IB needs to succeed, then analyses needs to be un-biased.

Pre-thinking.
Anything that shows that the practice is biased, leads to the right answer.

With this, I chose the answer B. OA is A.
Could you help me understand this?
Board of Directors
Joined: 01 Sep 2010
Posts: 3416
Re: Investment banks often have conflicting roles. They [#permalink]

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31 Jul 2014, 10:27
Merged similar topic.

Please use the search button before to post a question
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Intern
Joined: 25 May 2014
Posts: 41
Re: Investment banks often have conflicting roles. They [#permalink]

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01 Sep 2015, 12:40
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.
Director
Joined: 23 Jan 2013
Posts: 597
Schools: Cambridge'16
Re: Investment banks often have conflicting roles. They [#permalink]

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03 Sep 2015, 22:34
I'm not economist and used POE, imho BCDE can provide some success, but A not

A
Re: Investment banks often have conflicting roles. They   [#permalink] 03 Sep 2015, 22:34

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