<aside> <img src="/icons/bookmark_gray.svg" alt="/icons/bookmark_gray.svg" width="40px" /> Source: Cornerstone Research
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<aside> <img src="/icons/gavel_gray.svg" alt="/icons/gavel_gray.svg" width="40px" /> Example case: Intellectual Property
Analysts at Cornerstone Research start contributing to casework upon their arrival. Therefore, it is important that candidates have skills that translate into strategic thinking and quality work product. Not only will the case interview provide you with awareness of our work, it is another tool that provides us with insight into your thought process, comprehension skills, and your ability to articulate ideas.
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After five consecutive years of double-digit growth, Zilo Corporation,* a high-tech firm, completed its initial public offering at $20 per share. In less than a year, the stock traded in the mid-$60s. However, the company’s rapid growth left it too large for its existing management systems and unable to effectively compete with rivals. The stock became increasingly volatile, although most of its movement was downward. Then, Zilo lost its two largest customers, who together accounted for 40 percent of the firm’s sales. When this news became public, Zilo’s stock price plummeted to $16.
Subsequently, a group of Zilo’s shareholders filed a lawsuit against the firm’s officers and directors to recover losses on the stock. The suit alleged that Zilo managers knew that relations with key clients had collapsed months before they announced the collapse. If true, the charges would constitute a breach of the company’s fiduciary responsibilities to inform shareholders of any material changes in the firm’s business. The plaintiffs asked for a damage award based on a price decline of $40 per share.
Attorneys defending Zilo’s officers and directors asked Cornerstone Research to assist in preparing a finance professor to testify as an expert on the subject of valuation and its implications for shareholder damages. The case team consisted of an officer, an associate (who had recently graduated from business school), and an analyst.
First, the analyst examined daily stock price movements to determine how much of the $40 drop in share price owed to economy-wide and industry-wide news rather than to any alleged wrongdoing by the firm. Academic research indicates that the movements of broad stock market indexes tend to reflect economy-wide news. The analyst worked with the faculty expert to conduct a statistical analysis that quantified the relationship of Zilo’s stock price movements to economy-wide information. The results showed that economy-wide factors explained little about the decline in Zilo’s stock price.
In collaboration with the associate and the faculty expert, the analyst then identified a set of companies that shared industry attributes with Zilo. The analyst compiled this list of firms after in-depth review of industry publications, securities analyst reports, and internal company documents. Using statistical techniques, the analyst demonstrated that Zilo’s share price decline correlated closely with a similar decline in the value of the competitors’ stock prices. In other words, while economy-wide conditions explained little of the movement in Zilo’s stock price, industry factors, and not factors unique to Zilo, largely explained the fall of Zilo’s stock price.
After removing the effects of economy-wide and industry-wide developments, the case team undertook an “event study,” which matched the remaining statistically significant changes in Zilo’s stock price with news announcements and equity analyst reports released around the same time. This study showed that many of the significant stock price drops followed specific announcements. By eliminating stock price movements unrelated to the allegations in the case, the team concluded that only $3 of the price drop might relate to the allegations.
Based largely on the findings of the Cornerstone Research team, attorneys for the plaintiffs and defendants reached a settlement of the case.
<aside> <img src="/icons/extension_gray.svg" alt="/icons/extension_gray.svg" width="40px" /> We know a case interview can be challenging, so here are some tips that we trust will provide valuable guidance for a strong performance on the case interview.