Investment banks often have conflicting roles. They sometimes act for a client company by raising capital from other investment institutions...
GMAT Critical Reasoning : (CR) Questions
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?
Passage Analysis:
| Text from Passage | Analysis |
| Investment banks often have conflicting roles. |
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| 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. |
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| Analyses of companies' financial health need to be unbiased if an investment bank is to achieve long-term success. |
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Argument Flow:
The argument starts by identifying a conflict problem in investment banking, gives us a specific example of how this conflict plays out, then tells us what's needed for long-term success.
Main Conclusion:
Investment banks need unbiased analyses to achieve long-term success.
Logical Structure:
The premises show us there's a conflict between helping companies raise capital and providing honest reports about those companies. The conclusion tells us that despite this conflict, banks must keep their analyses unbiased to succeed long-term. This sets up a framework where we can evaluate what would hurt a bank's success - anything that compromises unbiased analysis.
Prethinking:
Question type:
Weaken - We need to find practices that would hinder the investment bank's long-term success
Precision of Claims
The key claim is that unbiased analyses are necessary for long-term success. The argument establishes a conflict between helping companies raise capital and providing honest reports about those same companies.
Strategy
To weaken this argument, we need to find practices that would make it harder for the bank to provide unbiased analyses or that would create even more conflicts of interest. We're looking for practices that would compromise the bank's ability to be objective in their financial health reports.
This practice creates a direct conflict of interest that would compromise unbiased analysis. When analysts know their performance reviews and rewards come from managers whose primary goal is raising capital for clients, they'll be incentivized to write favorable reports even about financially unhealthy companies. This directly undermines the argument's requirement that analyses must be unbiased for long-term success. This practice would definitely hinder the bank's long-term success.
Using internal analyst reports to determine fundraising strategies doesn't create any conflict that would compromise objectivity. This is simply using available information efficiently and doesn't pressure analysts to write biased reports. If anything, this practice relies on honest analysis to be effective, so it wouldn't hinder long-term success.
Sharing capital-raising tasks with other banks is a standard business practice that doesn't affect the objectivity of the bank's own analysts. The analysts would still be providing unbiased reports to their clients, and the conflict between capital-raising and analysis roles remains the same whether working alone or with other banks. This wouldn't hinder long-term success.
Having impartial arbitrators resolve conflicts between analysts and capital-raisers would actually help maintain objectivity. This practice acknowledges that conflicts will arise and provides a neutral way to resolve them without compromising either function. This would support rather than hinder long-term success by protecting the integrity of unbiased analysis.
Monitoring analyst predictions to improve future forecasting is a quality control measure that would enhance the accuracy and reliability of analyses. This practice encourages better, more accurate reporting rather than biased reporting, which supports the argument's requirement for unbiased analysis. This would help rather than hinder long-term success.