Publication

Activism, Strategic Trading, and Liquidity

Pierre Collin Dufresne, Tao Li
2018
Journal paper

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.

Official source

https://infoscience.epfl.ch/record/257260?ln=en

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Ontological neighbourhood

Economics

Macroeconomics: Markets

Mathematics

Mathematical logic: Set theory

Related concepts (36)

Activism

Activism (or advocacy) consists of efforts to promote, impede, direct or intervene in social, political, economic or environmental reform with the desire to make changes in society toward a perceived greater good. Forms of activism range from mandate building in a community (including writing letters to newspapers), petitioning elected officials, running or contributing to a political campaign, preferential patronage (or boycott) of businesses, and demonstrative forms of activism like rallies, street marches, strikes, sit-ins, or hunger strikes.

Market liquidity

In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold. In a liquid market, the trade-off is mild: one can sell quickly without having to accept a significantly lower price. In a relatively illiquid market, an asset must be discounted in order to sell quickly.

Economic efficiency

In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: Allocative or Pareto efficiency: any changes made to assist one person would harm another. Productive efficiency: no additional output of one good can be obtained without decreasing the output of another good, and production proceeds at the lowest possible average total cost. These definitions are not equivalent: a market or other economic system may be allocatively but not productively efficient, or productively but not allocatively efficient.

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