Case Examples
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, but it is also another tool that provides us with insight into your thought process, comprehension skills, and your ability to articulate ideas.
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.
- Break down questions into smaller parts to organize your thoughts.
- Consider the issue from multiple perspectives.
- During the interview, take notes and ask questions.
- Express your thought process to the interviewer.
- Finally, listen to your interviewers—they want to help you stay on track!
Case 1: Securities
After five consecutive years of double-digit growth, Zilo Corporation, a high-tech firm, completed its initial public offering (IPO) at $20 per share. In less than a year, the stock was trading at over $60 per share.
However, the company’s inability to adapt to its rapid growth left it unable to effectively compete with its rivals. As a result, the company’s stock began declining and experienced frequent volatility. Zilo then lost two of its 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.
Zilo’s shareholders filed a lawsuit against the firm’s officers and directors to recover losses on the stock, alleging that the officers and directors knew that Zilo’s relationship with the two customers had collapsed months before they actually made the announcement. If true, this would constitute a breach of Zilo’s fiduciary responsibility to inform shareholders of any material changes in the firm’s business.
Cornerstone Research was retained by attorneys defending Zilo’s officers and directors to support a finance professor in estimating the impact of the announcement on the company’s stock price (i.e., the amount that shareholders were damaged). Plaintiffs calculated damages as $40 per share, which was the decline in Zilo’s stock price over a month-long period over which the news of the collapse was disclosed to the public (i.e., the “class period”).
Key Questions
1. What is the problem with Plaintiffs’ approach to estimating damages?
Suggestion: Think about the main goal here: isolating the impact of the alleged misconduct on Zilo’s stock price. This is similar to how an economist would think about measuring the causal impact of one variable on another. By simply comparing Zilo’s stock price before and after the misconduct, what are Plaintiffs assuming with respect to other factors that affect stock price?
Analysis
- Plaintiffs’ approach effectively attributed all stock price movements during the class period to the alleged misconduct. However, there could also have been other news unrelated to the alleged misconduct that would affect Zilo’s stock price.
- Estimating damages caused by the alleged misconduct would require identifying and controlling for all other news and isolating how much of the $40 decline over the class period was attributable to the alleged misconduct.
2: What other news could have impacted Zilo’s stock price over the class period?
Suggestion: Take a step back and think broadly about what might affect a company’s stock price.
Analysis
- There could have been (1) economy-wide news that affected all publicly traded companies; (2) industry-wide news affecting companies in the same sector as Zilo; (3) Other Zilo-specific news unrelated to the alleged misconduct.
3: Damages in this context boil down to the difference between Zilo’s observed stock price during the class period and the “but-for” price, or what the price would have been absent news of the alleged misconduct. Is there analysis that could be used to estimate Zilo’s but-for price during the class period?
Suggestion: Think about a statistical analysis that could be helpful here.
Analysis
- Absent the alleged misconduct, Zilo’s stock price movements during the class period would be driven by the “other” factors identified in the previous question. Therefore, it would be helpful to (1) examine the relationship between Zilo’s stock price and these other factors outside the class period (i.e., during a period that is not confounded by the alleged misconduct), (2) examine how these other factors changed during the class peri-od and then use (1) and (2) to predict Zilo’s stock price during the class period.
- A regression modeling Zilo’s stock price as a function of these other factors, trained using data before the start of the class period, would help achieve (1) above.
- Data on the “other” factors during the class period can then be plugged into the model to generate predicted values for Zilo’s stock price during the class period.
4: How would one measure the impact of economy-wide and industry-wide factors on Zilo’s stock price?
Suggestion: Think about the sector that Zilo works in and what the drivers are for that particular sector. Separately, take a step back and think about macro indicators that could impact the sector and the company specifically.
Analysis
- The impact of market-wide factors should be reflected in the price of a market index such as the S&P 500.
- Similarly, the impact of industry-wide factors should be reflected in the price of other companies in the industry.
Summary
The case team performed a regression analysis modeling Zilo’s daily stock price over the year preceding the start of the class period (i.e., pre-period) as a function of the price of the S&P 500 and the price of an index comprising companies within the same industry as Zilo.
The team then used the results of the regression model to predict Zilo’s stock price on each day in the class period.
Then, they compared the predicted prices to the corresponding actual prices to identify days on which the actual return was statistically significantly lower than the predicted return.
- Zilo’s stock price movements on most days in the class period were not statistically different from their predicted price movements (i.e., they were entirely explained by market-wide and/or industry-wide news).
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.
Case 2: Intellectual Property
A federal court ruled that Duff Products Corporation (“Duff”) unlawfully used patented manufacturing techniques developed by ACME Manufacturing Company (“ACME”). ACME’s revenues declined during the period when Duff was using its manufacturing techniques. ACME claims that, because of Duff using its manufacturing techniques, it lost hundreds of millions of dollars in earnings opportunities.
Attorneys for Duff retained Cornerstone Research to determine the extent to which ACME’s alleged lost profits resulted from unauthorized use of its manufacturing techniques.
Key Questions
1. How could Duff’s use of ACME’s manufacturing techniques have resulted in ACME losing earnings opportunities?
Suggestion: ACME is making a causal claim: that ACME lost earnings opportunities because Duff used its manufacturing techniques. What else would have had to have happened for Duff to have caused ACME to lose revenue?
Analysis
- One possibility is that, by using ACME’s manufacturing techniques, Duff was able to sell to customers who would have otherwise bought from ACME. If this were the case, then ACME would have earned additional profits from these sales had Duff not used its manufacturing techniques.
2. Essentially, ACME’s claim is that, if Duff had not used ACME’s manufacturing techniques, then Duff’s customers would have purchased from ACME instead. Duff and ACME have both provided data on their customers. How could you use these data to test whether it is likely or not that Duff sold to customers who would have otherwise bought from ACME?
Suggestion: Think about how you could compare the characteristics of Duff and ACME’s customers.
Analysis
- If ACME and Duff sell to the same types of customers, then it seems possible that customers who purchased from Duff might have purchased from ACME if Duff had not used ACME’s manufacturing techniques. If, on the other hand, ACME and Duff sell to different types of customers, then it seems less likely that the customers who purchased from Duff would have otherwise purchased from ACME.
3. If ACME’s declining revenue is not the result of Duff using its manufacturing techniques, what else might explain why ACME was losing revenue? What evidence could you review to test your explanation?
Suggestion: Think broadly about market or industry factors that could impact ACME’s performance. There are several possible reasons why a manufacturing firm like ACME might see a decrease in revenue.
Analysis
Some examples include:
- Market-wide factors: an economic downturn, in general, or specific to the manufacturing sector, could negatively impact a firm like ACME. You could analyze data on the performance of the manufacturing sector to test this explanation.
- Increased competition: a new competing firm or product entering the market could decrease revenue for existing firms like ACME. Manufacturing sector analyst reports or industry publications could help provide evidence for this explanation.
4. The team found that ACME lost only a small amount of revenue because of Duff using its manufacturing techniques. What else would the team need to consider in determining the extent of ACME’s lost profits?
Suggestion: Remember that profit = revenue – costs.
Analysis
- ACME is likely to have significant variable costs associated with each of its sales, including labor and material costs.
- ACME is also likely to have considerable fixed costs (for example, manufacturing equipment).
- Analyzing ACME’s financial data could be helpful for understanding the relationship between ACME’s revenues and its profits.
Summary
The case team analyzed data on Duff’s and ACME’s customers and found that ACME and Duff sold products through different distribution channels to different customers.
- ACME sold directly to large institutions, while Duff sold primarily to retail chains patronized by individual consumers.
- In other words, the analysis showed that Duff’s revenue grew because it expanded the market, not because it sold to customers who would have otherwise purchased from ACME.
The team then reviewed securities analyst reports and industry publications to identify other explanations for ACME’s declining revenues.
- They found that ACME’s business had slowed following the introduction of a new technology that enabled other firms to provide institutional customers with better, cheaper products.
- ACME’s business suffered, not because of the actions cited in the lawsuit, but because ACME’s technology had become obsolete.
The team conducted an econometric analysis of Duff and ACME’s data to confirm that ACME’s declining revenue was better explained by the introduction of this new technology, rather than by Duff’s use of ACME’s manufacturing techniques.
Having demonstrated that ACME lost little revenue as a result of Duff’s actions, the team analyzed ACME’s costs to determine the relationship between its revenues and profits. Deducting appropriate costs suggested that ACME had lost little profit.