Activism Flashcards
Explain how liquidity can make activism more likely?
Activists wish to acquire the firm for q and sell it for v. If other shareholders are aware, they will only sell the shares for q=v. Even if shareholders do not observe that the activist is trying to take over, buying may push up the prices. The degree of stock liquidity will determine the degree to which you can acquire shares without driving up prices
What are two reasons why firms may care about liquidity?
Activism
Feedback (making share informative, benefiting from information)
What do Fang, Noe and Tice (2009) find about the effect of stock market liquidity?
Illiquidity has a significant negative effect on Operating Income (robust to controls for fixed effects and endogeneity)
How does the market maker set the price in the Boot and Thakor model?
Price is set at expected value. If value is either 1 or 0, price is the conditional probability of value being 1
In the model, what is the gross payoff to strategic investors who choose to become informed?
0.5 * (1/p (1-p)
How do you find the equillibrium amount of informed traders in the Boot and Thakor mode?
You define probability of value being 1 given demand exceeding amount of informed traders and solve using Bayes Rule. This is equal to price if value is always zero and 1.
Then you define gross payoff to investors by substatuting in the expected price set by the market maker. This gives gives the payoff as a function of the amount of investors who become informed. This must be equal to the information cost. Solve for the amount of informed investors.
How can you measure informativeness?
Calculate Var( E[P | v] ) where v is variable. If v is 0 or 1 with equal probability, this is an equally weighted average of the squared deviation of conditional expectation from unconditional expectation
What are two ways for firms to increase informativeness of share prices?
1) Lower the information cost, perhaps by increasing transparency
2) Security design. Removing risk-free components from securities. Adding a risk-free components increases the investment the informed trader must make to make an investment. Could also issue information sensitive securities, e.g. warrants
What is the mispricing loss in the Boot and Thakor model?
The difference between actual value (which may be known by the owner) and the market price
Do investors have bargaining power in the Boot and Thakor model?
No. They are expected to break even in expectation, such that there is no expected gain from obtaining information net of the cost
