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Econometrica Vol. 86 No. 4 2018

Activism, Strategic Trading, and Liquidity

Kerry Back1,2,3,4,5,6,7; Pierre Collin-Dufresne; Vyacheslav Fos1,2,3,4,5,6,7; Tao Li1,2,3,4,5,6,7; Alexander Ljungqvist1,2,3,4,5,6,7

1 Boston College · 2 National Bureau of Economic Research · 3 City University of Hong Kong · 4 Kerry Group (Ireland) · 5 École Polytechnique Fédérale de Lausanne · 6 New York University · 7 Rice University

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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 relationship 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.

DOI
10.3982/ecta14917
Volume
86
Issue
4
Pages
1431-1463
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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