Activism, Strategic Trading, and Liquidity

Alexander Ljungqvist (), Kerry E. Back, Pierre Collin-Dufresne, Vyacheslav Fos and Tao Li

No 12372, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 technologies 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; Strategic trading; Activism; Liquidity; Price impact; Market depth; Economic efficiency; Continuous time (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-cfn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Activism, Strategic Trading, and Liquidity (2018)
Working Paper: Activism, Strategic Trading, and Liquidity (2017)
Working Paper: Activism, Strategic Trading, and Liquidity (2016)
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