Standing on the shoulders of giants: The effect of passive investors on activism

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 pursue

changes to corporate control or influence 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 and a higher likelihood the activist obtains

board representation or the sale of the targeted company. Our findings suggest that the

large ownership stakes of passive institutional investors mitigate free-rider problems and

ultimately increase the likelihood of success by activists.