Chapter 16What Should We Do About Conflictsof Interest in the Financial Industry?Multiple Choice Questions1. Economies of scope refer to cost savings that arise when the(a) size of financial transactions increase.(b) size of financial transactions decrease.(c) number of different activities undertaken increases.(d) number of different activities undertaken decreases.Answer: C2. A financial institution can achieve cost savings by engaging in multiple activities. These are called economies of(a) scope.(b) scale.(c) complexity.(d) information.Answer: A3. A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of(a) scope.(b) scale.(c) complexity.(d) information.Answer: B4. Which combination of activities within a single financial institution is least likely to lead to conflicts of interest?(a) auditing and management advisory services(b) commercial banking and investment banking(c) assessment of credit quality and consulting(d) consumer lending and business lendingAnswer: D202Mishkin/EakinsFinancial Markets and Institutions, Fifth Edition5. Conflicts of interest pose a problem because they(a) lower the quality of information.(b) increase problems of asymmetric information.(c) make the financial system less efficient.(d) do all of the above.Answer: D6. An advantage of providing multiple financial services within one financial institution is that it(a) lowers information costs.(b) develops broader long-term relationships with customers.(c) both (a) and (b).(d) none of the above.Answer: C7. A conflict of interest occurs when(a) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service.(b) lenders prefer higher interest rates and borrowers prefer lower interest rates.(c) riskier borrowers are the ones who are more likely to apply for loans.(d) people expected to provide reliable information to the public have incentives not to do so.Answer: D8. A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in(a) investment banking.(b) commercial banking.(c) accounting firms.(d) mutual funds.Answer: A9. If potential revenues from underwriting greatly exceed brokerage commissions, there is _ incentive for investment bank analysts to report _ information about firms issuing securities.(a) stronger; unbiased(b) stronger; favorable(c) weaker; unbiased(d) weaker; favorableAnswer: B10. Spinning is the practice of(a) investment banks allowing executives of potential client companies to buy underpriced initial public offerings of other companies securities.(b) investment bank analysts providing misleading information about a company to encourage more investors to purchase the companys securities.(c) accounting firms encouraging its audit clients to also purchase its manage advisory services.(d) credit rating agencies providing higher ratings on a companys securities in order to develop a long-term relationship with the company.Chapter 16What Should We Do About Conflicts of Interest in the Financial Industry?203Answer: A204Mishkin/EakinsFinancial Markets and Institutions, Fifth Edition11. Investment banks are guilty of conflict of interest when they(a) pressure their analysts to produce research favorable to their client firms.(b) permit executives of client firms to alter analysts research on their firms.(c) prohibit analysts from making negative or controversial comments about client firms.(d) all of the above.Answer: D12. Investment banks serve two client groups,(a) home buyers and mortgage lenders.(b) people saving for retirement and pension funds.(c) issuers of securities and investors in those securities.(d) mutual funds and investors with relatively small amounts to invest.Answer: C13. Auditors attempt to reduce information asymmetry between a firms managers and its(a) customers.(b) owners.(c) employees.(d) competitors.Answer: B14. Conflicts of interest in the Arthur Andersen accounting firm intensified when _ became the firms largest source of profits and large clients pressured _ office managers to give favorable audits.(a) consulting; regional(b) consulting; national(c) auditing; regional(d) auditing; nationalAnswer: A15. The potential conflict of interest when a single accounting firm provides both auditing and consulting services is that the firm can(a) charge higher fees to its audit clients and lower fees for its consulting services so it can expand its consulting business.(b) charge higher fees to its consulting clients and lower fees for its audit services so it can expand its auditing business.(c) provide unjustifiably favorable audit reviews for firms that are large clients for its consulting services.(d) pressure its clients into paying high fees for both auditing and consulting services.Answer: C16. The conflict of int