2018

Activism, Strategic Trading, and Liquidity

Reprint No. 2018:75

Author(s): Kerry Back, Pierre Collin‐Dufresne, Vyacheslav Fos, Tao Li and Alexander LjungqvistYear: 2018 Title: Econometrica Volume (No.): 86 (4) Pages: 1431–1463
Online article (restrictions may apply)


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.


Reference:
Back, Kerry, Pierre Collin‐Dufresne, Vyacheslav Fos, Tao Li and Alexander Ljungqvist (2018), "Activism, Strategic Trading, and Liquidity". Econometrica 86(4), 1431–1463.

Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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