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Activism, Strategic Trading, and Liquidity

Author

Listed:
  • 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)

  • Tao Li

    (City University of Hong Kong)

  • Alexander Ljungqvist

    (New York University (NYU), National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), European Corporate Governance Institute (ECGI), and Research Institute of Industrial Economics (IFN))

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.

Suggested Citation

  • Kerry Back & Pierre Collin-Dufresne & Vyacheslav Fos & Tao Li & Alexander Ljungqvist, 2018. "Activism, Strategic Trading, and Liquidity," Swiss Finance Institute Research Paper Series 18-42, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1842
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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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