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• Case | HBS Case Collection | February 2020

  Highfields Capital and McDonalds

  Mark Egan and Robin Greenwood

  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.

  Keywords: McDonald's; Stocks; Performance Improvement; Operations; Finance; Restructuring; Value Creation; Financial Services Industry;

  Citation:

  Egan, Mark, and Robin Greenwood. "Highfields Capital and McDonalds." Harvard Business School Case 220-061, February 2020.  View Details

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• Working Paper | 2019

  A Quantity-Driven Theory of Term Premiums and Exchange Rates

  Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein and Adi Sunderam

  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.

  Keywords: term premium; exchange rate; Bonds; Currency; Theory;

  Citation:

  Greenwood, Robin, Samuel G. Hanson, Jeremy C. Stein, and Adi Sunderam. "A Quantity-Driven Theory of Term Premiums and Exchange Rates." Working Paper, November 2019.  View Details

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• Working Paper | 2019

  Reflexivity in Credit Markets

  Robin Greenwood, Samuel G. Hanson and Lawrence J. Jin

  Reflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short run—even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and "calm before the storm" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.

  Keywords: reflexivity; Attitudes; Financial Markets; Forecasting and Prediction; Investment; Credit;

  Citation:

  Greenwood, Robin, Samuel G. Hanson, and Lawrence J. Jin. "Reflexivity in Credit Markets." NBER Working Paper Series, No. 25747, April 2019.  View Details

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