Activism, Strategic Trading, and Liquidity

Activism, Strategic Trading, and Liquidity

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

Series number :

Serial Number: 

Date posted :

March 10 2017

Last revised :

October 17 2017
SSRN Share


  • Kyle model • 
  • insider trading • 
  • Strategic Trading • 
  • asymmetric information • 
  • liquidity • 
  • price impact • 
  • market depth • 
  • Activism • 
  • unobservable effort • 
  • economic efficiency • 
  • Continuous Time

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.


Real name:
Kerry Back
Real name:
PIerre Collin-Dufresne
Ecole Polytechnique Fédérale de Lausanne
Real name:
Tao Li
University of Warwick