Investment Banking

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Investment Banking

by ssgmatter » Wed May 05, 2010 6:40 am
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 am stuck between A,B and E here......Please explain each of the choice with reasons.....

C--> other investment banks is OOS
D--> Impartial arbitrators who cares!
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by gmatmachoman » Wed May 05, 2010 7:40 am
A seems to be a plausible answer!!

IMO A. The same managers who are responsible for raising capital(Positive work) are also recommending the analyst who inturn write off unfavourable reports to other clients who are going to make "probable" investments in the X company.

In the short term, analyst can bring in some fortune for the "services" they make to the "investors. But in Long term based on analyst reports the "futuristic/potential" investors will shun off becox of negative feedback.

SO rewaring them(based on biased data) will dampen/hinder the Ibanks prospects!

IMO A

Plz post OA!!

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by ssgmatter » Thu May 06, 2010 6:40 am
Any thoughts on this one guys....Experts plese advise

Thanks!
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by MRehman » Thu May 06, 2010 7:40 am
I am between A and B. The question stem talks about policies that would "hinder" the long term success.

A>> It is a very good contender since the managers who are charged with evaluating the bank analyst's reports are also the one responsible for raising the capital.

B>> Using reports by the invesment bank's analysts to determine the best way of raising the capital. This means that if the reports are biased, then the invesment bankers would simply push the investing companies to invest resulting in a long term failure.


What is the OA??

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by ssgmatter » Thu May 06, 2010 8:00 am
Please ignore by mistake
Last edited by ssgmatter on Sat May 08, 2010 7:58 am, edited 1 time in total.
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by ssgmatter » Thu May 06, 2010 8:01 am
Please explain with reasons why B is wrong.........
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by aimkp » Thu May 06, 2010 8:37 am
Hi..

I am with A . as accepting reports from same people, who are raising capitals

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by ssgmatter » Fri May 07, 2010 6:06 am
Any taker on this one
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by kevincanspain » Sat May 08, 2010 9:08 am
Analysts have to please both companies seeking investors and investors seeking investment opportunities. They hope to be sucessful in attracting capital for these companies, but do not want to disappoint investors with bad information

If you choose B, you do so because you see how using these investment reports to determine how to raise capital for a client would somehow threaten the long term success of the bank. Such a practice, in itself, would not force the bank to misrepresent an investment opportunity to a potiential investor, so it is not evident why this practice would be detrimental to the bank.

However, if A is true, analysts will see that they will be rewarded for consistently making investment opportunities look safer and more lucrative than they actually are (i.e. giving investors inaccurate or misleading information). Investors are likely to take their money elsewhere after a few of their investments cause them to lose money.

Imagine you ran a dating service, hoping to match men with women. Of course, you want to serve your male clients well by finding them dates, but not at the expense of the female ones. If you consistently overstate the virtues of the men and downplay or fail to mention their flaws, your female clients will soon get angry and conclude that all they are going to see from your dating agency are psychopaths, womanizers, nerds, mama's boys, and worst of all, men who wear dress socks and shorts when the weather is hot!
Last edited by kevincanspain on Sat May 08, 2010 9:43 am, edited 1 time in total.
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by ssgmatter » Sat May 08, 2010 9:28 am
kevincanspain wrote:Analysts have to please both companies seeking investors and investors seeking investment opportunities. They hope to be sucessful in attracting capital for these companies, but do not want to disappoint investors with bad information

If you choose B, you do so because you see how using these investment reports to determine how to raise capital for a client would somehow threaten the long term success of the bank. Such a practice, in itself, would not force the bank to misrepresent an investment opportunity to a potiential investor, so it is not evident why this practice would be detrimental to the bank.

However, if A is true, analysts will see that they will be rewarded for consistently making investment opportunities look safer and more lucrative than they actually are (i.e. giving investors inaccurate or misleading information). Investors are likely to take their money elsewhere after a few of their investments cause them to lose money.

Imagine you ran a dating service, hoping to match men with women. Of course, you want to serve your male customers well by finding them dates, but not at the expense of the female ones. If you consistently overstate the virtues of the men and downplay or fail to mention their flaws, your female customers will soon get angry and conclude that all they are going to see from your dating agency are psychopaths, womanizers, nerds, mama's boys, and worst of all, men who wear dress socks and shorts when the weather is hot!
Thankyou for your thoughts on this one. It is really very helpful.
So option B suggests that just merely using the reports won't hurt the IB's long term success...but if the analyst produce wrong reports then it would hurt the investors who would be planning to invest money in future and using such reports would only harm the reputation of the IB's in long term....Please correct me!

The example of dating service was pretty funny but helps to understand the logic running behind the question...:-)

Many thanks!
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by vineetbatra » Wed May 12, 2010 4:57 pm
kevincanspain wrote: Imagine you ran a dating service, hoping to match men with women. Of course, you want to serve your male clients well by finding them dates, but not at the expense of the female ones. If you consistently overstate the virtues of the men and downplay or fail to mention their flaws, your female clients will soon get angry and conclude that all they are going to see from your dating agency are psychopaths, womanizers, nerds, mama's boys, and worst of all, men who wear dress socks and shorts when the weather is hot!
Good one Kevin, Dress socks with Shorts, thats actually funny... but wats wrong with NERDS, you should watch the move "Revenge of the Nerds" Funny one

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by Anaira Mitch » Wed May 03, 2017 11:00 pm
Any Expert's take?

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by DavidG@VeritasPrep » Thu May 04, 2017 8:52 am
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
Boiled way down, the argument describes a conflict of interest at investment banks. One division helps raise capital for other companies. Another division evaluates those very same companies that are prospective clients. The problem: the analyst division might be motivated to produce positive reports for a company that the capital-raising division wishes to woo as a client. This is bad. We're looking for an answer choice that would hinder the banks' long-term success. So we're looking for a scenario that would produce the aforementioned undesired result.

Look at 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 analysts are rewarded by managers in charge of raising capital then those analysts will have a strong incentive to produce only positive reports for the companies they evaluate. (Remember the managers in charge of raising capital are trying to win the business of these companies! Hard to imagine that these companies would be excited to hire a bank whose analyst division just issued a scathing report about its prospects.) This will interfere with the analysts' ability to be unbiased - a problem for the bank.
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