Asset Pricing Implications of Strategic Trading and Activism

75 Pages Posted: 11 Nov 2018

See all articles by Ivan Marinovic

Ivan Marinovic

Graduate School of Business, Stanford University

Felipe Varas

Duke University - Fuqua School of Business - Finance Department

Date Written: October 19, 2018

Abstract

This paper studies the asset pricing implications of investor activism. We consider a setting where a blockholder can both trade the firm’s shares and influence the firm value by exerting costly effort. The blockholder’s ability to add value varies over time. To understand the effects of blockholder transparency, we consider two regimes: one in which the market observes the blockholder’s ability and another where it does not. i) When the market observes the blockholder’s ability, the blockholder’s trading is characterized by Coasian dynamics: despite his large size, the blockholder is unable to exploit his market power and trades at a competitive price. Furthermore, when his ability to add value increases, the blockholder sells shares which in turn diminishes his incentives to boost the firm’s productivity. ii) By contrast, when the blockholder privately observes his ability, the dynamics of trading and activism change drastically: as the blockholder’s ability improves, he buys shares. He does so gradually to mitigate the price impact of his trading. As the blockholder’s stock-holdings grow, a virtuous circle unravels that boosts the firm’s productivity and reduces the firm’s cost of capital. In the long-run, the presence of information asymmetry about blockholder ability leads to a more concentrated ownership, more intense activism, and higher firm productivity. However, it also leads to more volatile cash flows, and a higher risk-premium. The implications for the firm’s stock price are ambiguous.

Keywords: Activism, Strategic Trading, Asset Pricing

JEL Classification: D72, D82, D83, G20

Suggested Citation

Marinovic, Ivan and Varas, Felipe, Asset Pricing Implications of Strategic Trading and Activism (October 19, 2018). Stanford University Graduate School of Business Research Paper No. 19-2. Available at SSRN: https://ssrn.com/abstract=3270037 or http://dx.doi.org/10.2139/ssrn.3270037

Ivan Marinovic (Contact Author)

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Felipe Varas

Duke University - Fuqua School of Business - Finance Department ( email )

Durham, NC 27708-0120
United States

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