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Investment banks often have conflicting roles. They sometimes act for

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

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

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

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New post 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 sometimes act for  [#permalink]

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New post 05 Apr 2016, 03:40
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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 sometimes act for  [#permalink]

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New post 20 Apr 2016, 07:13
what question type is this? paradox?
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New post 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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New post 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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New post 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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New post 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 sometimes act for  [#permalink]

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New post 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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New post 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 sometimes act for  [#permalink]

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New post 25 Sep 2016, 00:41
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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 sometimes act for  [#permalink]

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New post 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 sometimes act for  [#permalink]

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New post 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 sometimes act for  [#permalink]

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New post 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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New post 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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New post 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 sometimes act for  [#permalink]

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New post 21 Aug 2018, 13:25
Can somone clarify which question type is this?
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Re: Investment banks often have conflicting roles. They sometimes act for  [#permalink]

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New post 10 Nov 2018, 09:16
stevegt 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. 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


Can anyone help me explain meaning of "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". I cant understand the whole sêntence
Tks so much if I receive ur help.
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Re: Investment banks often have conflicting roles. They sometimes act for &nbs [#permalink] 10 Nov 2018, 09:16

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