Working Paper: NBER ID: w19619
Authors: Pierre Collin-Dufresne; Vyacheslav Fos
Abstract: We analyze a model of informed trading where an activist shareholder accumulates shares in an anonymous market and then expends costly effort to increase the firm value. We find that equilibrium prices are affected by the position accumulated by the activist, because the level of effort undertaken is increasing in the size of his acquired position. In equilibrium, price impact has two components: one due to asymmetric information (as in the seminal Kyle (1985) model) and one due to moral hazard (a new source of illiquidity). Price impact is higher the more severe the moral hazard problem, which corresponds to a more productive activist. We thus obtain a trade-off: with more noise trading (less `price efficiency') the activist can build up a larger stake, which leads to more effort expenditure and higher firm value (more `economic efficiency').
Keywords: No keywords provided
JEL Codes: G00; G10; G12; G14; G3; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| activist's stake size (D72) | effort expenditure (E20) |
| effort expenditure (E20) | firm value (G32) |
| activist's stake size (D72) | firm value (G32) |
| moral hazard severity (G52) | price dynamics (E30) |
| ownership disclosure regulations (K25) | activist's influence on firm value (G34) |
| ownership disclosure regulations (K25) | reduced share accumulation (G34) |
| ownership disclosure regulations (K25) | reduced effort expenditure (D29) |