Activism, Strategic Trading, and Liquidity

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

No 22893, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-mst
Note: AP CF
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Citations: View citations in EconPapers (1)

Published as Kerry Back & Pierre Collin‐Dufresne & Vyacheslav Fos & Tao Li & Alexander Ljungqvist, 2018. "Activism, Strategic Trading, and Liquidity," Econometrica, Econometric Society, vol. 86(4), pages 1431-1463, July.

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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 (2017)
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