City University of Hong Kong
NBER Working Papers and Publications
|December 2016||Activism, Strategic Trading, and Liquidity|
with Kerry Back, Pierre Collin-Dufresne, Vyacheslav Fos, Alexander Ljungqvist: w22893
We analyze dynamic trading in an anonymous market 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. The optimal continuous trading strategy is independent of the activism technology. Activism, prices, and liquidity are jointly determined in equilibrium. Variation in noise trading volatility can produce either positive or negative effects on both efficiency and liquidity, depending on the activism technology and model parameters, because future effort depends on the realized amount of noise trading. The `lock in' effect emphasized in previous literature (e.g., Maug (1998)) holds only for special forms of the activism technology. Reducing the unc...
|November 2013||Liquidity and Governance|
with Kerry Back, Alexander Ljungqvist: w19669
Is greater trading liquidity good or bad for corporate governance? We address this question both theoretically and empirically. We solve a model consisting of an optimal IPO followed by a dynamic Kyle market in which the large investor's private information concerns her own plans for taking an active role in governance. We show that an increase in the liquidity of the firm's stock increases the likelihood of the large investor 'taking the Wall Street walk.' Thus, higher liquidity is harmful for governance. Empirical tests using three distinct sources of exogenous variation in liquidity confirm the negative relation between liquidity and blockholder activism.