Williams, 2002

Joshua  Coval; Robin  Greenwood; Peter  Tufano

Case | HBS Case Collection | December 2002 (Revised October 2013)

Williams, 2002

by Joshua Coval, Robin Greenwood and Peter Tufano

Abstract

Williams, a Tulsa, Oklahoma-based firm in various energy businesses, must decide whether to accept a financing package offered by Berkshire Hathaway and Lehman Brothers. The proposed one-year credit facility would provide the firm with financial resources in a difficult period.

Keywords: Financial Management; Crisis Management; Credit; Capital Structure; Financial Strategy; Financing and Loans; Financial Instruments; Energy Industry; United States;

Language: English

Format: Print

17 pages

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Citation:

Coval, Joshua, Robin Greenwood, and Peter Tufano. "Williams, 2002." Harvard Business School Case 203-068, December 2002. (Revised October 2013.)

Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

McDonald’s reported its fifth consecutive quarter of declining same-store sales growth in early 2015. Despite McDonald’s recent poor performance, Jonathon S. Jacobson, the founder and Chief Investment Officer of Boston-based Highfields Capital Management, had initiated a large position in McDonald’s stock. Jacobson and his team believed that there was enormous upside in McDonald’s stock if management successfully implemented what they perceived to be straightforward operational and financial changes. McDonald’s needed to return to its core competencies of producing quick and reliable burgers and fries. In addition, they believed that financial restructuring could unlock sizable value for investors. Jacobson and his team debated whether to more forcefully articulate their vision for the company and began drafting a letter to Andrew McKenna, McDonald’s Chairman.

We develop a model in which risk-averse, specialized bond investors must be paid to absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, our model naturally links the predictability of long-term bond returns to the predictability of foreign exchange returns. Specifically, a shift in the net supply of long-term bonds in one currency influences bond term premiums in both currencies as well as the foreign exchange rate between the two currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and bond term premiums as well as the finding that central banks' quantitative easing policies impact not only local-currency long-term yields, but also foreign exchange rates. We also show that this quantity-driven approach provides a unified account explaining both why foreign exchange tends to outperform when the foreign interest rates exceed domestic rates and why long-term bonds tend to outperform when the yield curve is steep.

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Williams, 2002

Abstract

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Faculty & Research

Williams, 2002

Abstract

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