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Activism, Strategic Trading, and Liquidity

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  • Back, Kerry E.
  • Collin-Dufresne, Pierre
  • Fos, Vyacheslav
  • Li, Tao
  • Ljungqvist, Alexander P.

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.

Suggested Citation

  • Back, Kerry E. & Collin-Dufresne, Pierre & Fos, Vyacheslav & Li, Tao & Ljungqvist, Alexander P., 2017. "Activism, Strategic Trading, and Liquidity," CEPR Discussion Papers 12372, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12372
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    References listed on IDEAS

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    Cited by:

    1. Cookson, J. Anthony & Fos, Vyacheslav & Niessner, Marina, 2021. "Does Disagreement Facilitate Informed Trading? Evidence from Activist Investors," SocArXiv q8xvc, Center for Open Science.
    2. Gu, Lifeng & Wang, Yixin & Yao, Wentao & Zhang, Yilin, 2018. "Stock liquidity and corporate diversification: Evidence from China’s split share structure reform," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 57-80.
    3. Lucian A. Bebchuk & Alon Brav & Wei Jiang & Thomas Keusch, 2019. "Dancing With Activists," NBER Working Papers 26171, National Bureau of Economic Research, Inc.
    4. Corum, Adrian Aycan, 2021. "Fighting Fire with Fire: Optimality of Value Destruction to Mitigate Short-Termism," OSF Preprints xhwmg, Center for Open Science.
    5. Habibi Khalaj, Ali & Halgamuge, Saman K., 2017. "A Review on efficient thermal management of air- and liquid-cooled data centers: From chip to the cooling system," Applied Energy, Elsevier, vol. 205(C), pages 1165-1188.
    6. Shreya Bose & Ibrahim Ekren, 2020. "Kyle-Back Models with risk aversion and non-Gaussian Beliefs," Papers 2008.06377, arXiv.org, revised Sep 2021.
    7. Johnson, Travis L. & Swem, Nathan, 2021. "Reputation and investor activism: A structural approach," Journal of Financial Economics, Elsevier, vol. 139(1), pages 29-56.
    8. Ordonez-Calafi, Guillem & Bernhardt, Dan, 2019. "Blockholder Disclosure Thresholds and Hedge Fund Activism," The Warwick Economics Research Paper Series (TWERPS) 1203, University of Warwick, Department of Economics.
    9. Asadul Islam, 2017. "Cross-modal Computer Games as an Interactive Learning Medium," Proceedings of International Academic Conferences 5007280, International Institute of Social and Economic Sciences.
    10. Burkart, Mike & Lee, Samuel, 2021. "Activism and takeovers," LSE Research Online Documents on Economics 111564, London School of Economics and Political Science, LSE Library.
    11. Fos, Vyacheslav & Kahn, Charles, 2019. "The Threat of Intervention," CEPR Discussion Papers 13654, C.E.P.R. Discussion Papers.
    12. Bebchuk, Lucian A. & Brav, Alon & Jiang, Wei & Keusch, Thomas, 2020. "Dancing with activists," Journal of Financial Economics, Elsevier, vol. 137(1), pages 1-41.

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    More about this item

    Keywords

    activism; continuous time; economic efficiency; Kyle model; liquidity; market depth; price impact; strategic trading;
    All these keywords.

    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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