Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism

Ian R Appel, Todd A Gormley and Donald B Keim

The Review of Financial Studies, 2019, vol. 32, issue 7, 2720-2774

Abstract: We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to seek board representation when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights, settlements, and a higher likelihood the activist achieves board representation or the sale of the targeted company. Our findings suggest that the recent growth of passive institutional investors mitigates free-rider problems and facilitates activists’ ability to engage in costly, value-enhancing forms of monitoring.Received September 28, 2016; editorial decision August 18, 2018 by Editor Andrew Karolyi.

Date: 2019
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