Activism, Strategic Trading, and Liquidity
Kerry Back, Pierre Collin-Dufresne, Vyacheslav Fos, Tao Li, Alexander Ljungqvist
Econometrica · 2018 · Volume 86 · Issue 4
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.
Keywords
Kyle model, insider trading, strategic trading, asymmetric information, liquidity, price impact, market depth, activism, unobservable effort, economic efficiency, continuous time
Enable JavaScript for citation tools and additional paper interactions.