Activism, Strategic Trading, and Liquidity

Kerry Back, Pierre Collin-Dufresne, Vyacheslav Fos, Tao Li and Alexander Ljungqvist ()
Additional contact information
Kerry Back: Rice University
Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne, National Bureau of Economic Research (NBER), and Swiss Finance Institute
Vyacheslav Fos: Boston College

No 18-42, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We analyze dynamic trading by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. Variation in parameters can produce either positive or negative relations between market liquidity and economic efficiency, depending on the activism technology and model parameters. Two results that contrast with the previous literature are that (a) the relation between market liquidity and economic efficiency is independent of the activist's initial stake for a broad set of activism echnologies and (b) an increase in noise trading can reduce market liquidity, because it increases uncertainty about the activist's trades (the activist trades in the opposite direction of noise traders) and thereby increases information asymmetry about the activist's intentions.

Keywords: Kyle model; insider trading; strategic trading; asymmetric information; liquidity; price impact; market depth; activism; unobservable effort; economic efficiency; continuous time (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2018-05
New Economics Papers: this item is included in nep-cfn and nep-mst
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Activism, Strategic Trading, and Liquidity (2017)
Working Paper: Activism, Strategic Trading, and Liquidity (2017)
Working Paper: Activism, Strategic Trading, and Liquidity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1842

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