Question 1

Describe what is meant by economies of scope and explain how financial institutions' realizing economies of scope has led to an increase in conflicts of interest.

Accepted Answer

Economies of scope is when firms can reduce costs by offering different products or services. For a financial institution, this usually takes the form of taking one information source and using it to provide a different array of services. This may lead to conflicts of interest because these services may have conflicting goals in which employees of different departments may conceal information or disseminate misleading information to financial markets.

Question 2

Conflicts of interest arising from management advisory services brought down ________ in 2002.

Accepted Answer

The management advisory services provided by Arthur Andersen to Enron, including auditing and consulting, created conflicts of interest and contributed to the accounting scandals that led to the bankruptcy of Enron in 2001 and the downfall of Arthur Andersen in 2002.

Question 3

When investment banks allocate shares of a popular but underpriced IPO to executives of other firms in order to attract their business, it is called

Accepted Answer

This practice is known as spinning, where investment banks offer shares of a highly sought-after IPO to executives of other firms as an inducement for them to do business with the bank. It has been criticized as a form of bribery and insider trading, and it is illegal under US securities laws.

Question 4

When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing

Accepted Answer

Economies of scope occur when a financial institution is able to use a common set of inputs to produce multiple products or services. By doing so, the cost of producing each service is reduced, resulting in lower average costs overall. This is different from economies of scale, which refer to cost savings that come from increasing the level of production for a single product or service.

Question 5

Which of the following is an example of a bank realizing economies of scope?

Accepted Answer

The answer of Which of the following is an example...

Question 6

A type of ________ problem that occurs when a person or institution has multiple objectives that conflict with each other is called ________.

Accepted Answer

The answer of A type of ________ problem that occurs...

Question 7

One problem with conflicts of interest is that they can reduce the ________ in financial markets, thereby increasing ________.

Accepted Answer

Conflicts of interest can lead to biased or incomplete information being disseminated in financial markets, which can increase the asymmetry of information between market participants. This can lead to market inefficiencies and may ultimately harm investors. Therefore, conflicts of interest can reduce the quality of information in financial markets, not the quantity. It is also unlikely that conflicts of interest would directly increase financial institutions' profits, as this would require assumptions about the specific nature of the conflicts of interest and the markets in question.

Question 8

Explain the type of conflicts of interest that can arise from the development of universal banking.

Accepted Answer

The answer of Explain the type of conflicts of interest...

Question 9

Advice on taxes, accounting or management information systems, and business strategies are commonly referred to as ________ services.

Accepted Answer

Accounting audit refers to the examination of financial statements, while a managing underwriter is involved in the issuance of securities. Seller is not a relevant term in this context. Therefore, management advisory is the only suitable option that matches the description provided.

Question 10

In investment banking, a conflict usually is present between the issuers of securities, who ________, and investors, who ________.

Accepted Answer

Issuers of securities usually benefit from optimistic research as it helps to attract investors to buy their securities while investors desire unbiased research to make informed decisions about investing in the securities. There is no mention of auditing or consulting in the context of the conflict.

Question 11

Conflicts of interest may arise within the credit rating agencies because

Accepted Answer

Conflicts of interest arise when the credit rating agencies are paid by the issuers of debt securities to provide ratings. This can create pressure on the rating agency to provide a higher rating than is warranted in order to maintain a good relationship with the issuer and to continue to receive future business. This conflict of interest was a key factor in the financial crisis of 2008, as agencies were giving AAA ratings to mortgage-backed securities that turned out to be much riskier than anticipated.

Question 12

Evidence suggests that credit-rating agencies ________ exploited conflicts of interest because ________.

Accepted Answer

The answer of Evidence suggests that credit-rating agencies ________ exploited...

Question 13

When the Glass-Steagall Act was repealed in 1999, potential conflicts of interest arose with

Accepted Answer

The Glass-Steagall Act separated commercial and investment banking in order to prevent conflicts of interest. When it was repealed in 1999, the development of universal banking allowed for commercial banks to engage in investment banking activities, potentially creating conflicts of interest.

Question 14

Which of the following is not a conflict of interest in accounting firms?

Accepted Answer

The answer of Which of the following is not a...

Question 15

Not surprisingly, when financial institutions have consolidated more services under one roof, the amount of conflicts of interest has ________, which has led to ________ in unethical behavior.

Accepted Answer

When financial institutions consolidate more services under one roof, it creates more opportunities for conflicts of interest to arise. This, in turn, increases the likelihood of unethical behavior. Therefore, as the consolidation of services has increased, so too have the conflicts of interest and unethical behavior.

Question 16

Conflicts of interest is a type of ________ problem that occurs when a person or institution has multiple objectives that are in conflict with each other.

Accepted Answer

Conflicts of interest occur when someone is in a position where they may benefit personally or financially from a decision that goes against the best interests of someone else. This creates a moral hazard problem because the person with the conflict of interest may be tempted to prioritize their own interests over those they are supposed to be serving.

Question 17

In 2008, it became clear that the credit-rating agencies ________ the risk of the subprime products that ________.

Accepted Answer

The answer of In 2008, it became clear that the...

Question 18

The incentive for analysts in investment banks to distort research increases when

Accepted Answer

The potential revenues from underwriting greatly exceed brokerage commissions provide a higher financial incentive for analysts to distort their research in favor of companies that the investment bank is underwriting. This is because the investment bank earns a much larger fee from underwriting services compared to brokerage commissions. As a result, analysts may feel pressure to provide a positive outlook on companies in order to increase the chances of being selected to underwrite their offerings, which can lead to conflicts of interest and biased research.

Question 19

Evidence suggests that the market ________ take into account the credibility of analyst's recommendations of IPO's that were underwritten at the analyst's investment bank because the performance of these recommendations was about 50% ________ compared to recommendations made by other analysts at different investment banks.

Accepted Answer

The sentence states that the performance of analyst's recommendations of IPO's underwritten at their investment bank was about 50% worse compared to recommendations made by other analysts at different investment banks. This suggests that the market does not take into account the credibility of these recommendations, as their performance is worse than those made by analysts at other investment banks.

Question 20

The problem with spinning is that it may ________ the cost of capital to a firm and thus ________ the efficiency of the capital market.

Accepted Answer

Spinning is the practice of underwriters awarding hot IPO stocks to executives of companies that are likely to be or already are clients of the underwriters. This creates a conflict of interest and may lead to an increase in the cost of capital for the firm as it raises suspicions from investors about the accuracy and integrity of the stock's valuation. This, in turn, may decrease the efficiency of the capital market, as investors become less willing to invest in IPOs due to a perceived lack of fairness in the allocation process.

Quiz 15: Conflicts of Interest in the Financial Industry

Describe what is meant by economies of scope and explain how financial institutions' realizing economies of scope has led to an increase in conflicts of interest.

Conflicts of interest arising from management advisory services brought down ________ in 2002.

When investment banks allocate shares of a popular but underpriced IPO to executives of other firms in order to attract their business, it is called

When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing

Which of the following is an example of a bank realizing economies of scope?

A type of problem that occurs when a person or institution has multiple objectives that conflict with each other is called .

One problem with conflicts of interest is that they can reduce the in financial markets, thereby increasing .

Explain the type of conflicts of interest that can arise from the development of universal banking.

Advice on taxes, accounting or management information systems, and business strategies are commonly referred to as ________ services.

In investment banking, a conflict usually is present between the issuers of securities, who , and investors, who .

Conflicts of interest may arise within the credit rating agencies because

Evidence suggests that credit-rating agencies exploited conflicts of interest because .

When the Glass-Steagall Act was repealed in 1999, potential conflicts of interest arose with

Which of the following is not a conflict of interest in accounting firms?

Not surprisingly, when financial institutions have consolidated more services under one roof, the amount of conflicts of interest has , which has led to in unethical behavior.

Conflicts of interest is a type of ________ problem that occurs when a person or institution has multiple objectives that are in conflict with each other.

In 2008, it became clear that the credit-rating agencies the risk of the subprime products that .

The incentive for analysts in investment banks to distort research increases when

The problem with spinning is that it may the cost of capital to a firm and thus the efficiency of the capital market.