NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Activism, Strategic Trading, and Liquidity

Kerry Back, Pierre Collin-Dufresne, Vyacheslav Fos, Tao Li, Alexander Ljungqvist

NBER Working Paper No. 22893
Issued in December 2016, Revised in October 2017
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w22893

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