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Activism, Strategic Trading, and Liquidity

Author

Listed:
  • Kerry Back
  • Pierre Collin‐Dufresne
  • Vyacheslav Fos
  • Tao Li
  • Alexander Ljungqvist

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.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:emetrp:v:86:y:2018:i:4:p:1431-1463
    DOI: 10.3982/ECTA14917
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    JEL classification:

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

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