show how passive investing also leads to more aggressive shareholder activism than there would be otherwise, as passive fund firms add their clout to campaigns waged by activist investors. Their paper is titled, “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism.”“We’re asking whether two recent trends in U.S. stock ownership — the rise of activism and the growth of passive investors — are related,” [co-writer Todd A.] Gormley says. “Might the rise in passive ownership actually, somehow, be facilitating activism?”
In the paper, Gormley and his co-authors, Donald B. Keim, and Ian R. Appel, find that:
the rise in activism and its successes has coincided with the growing influence of passive institutional investors. Passively managed mutual funds now account for more than a third of all mutual fund assets, and the institutions that offer these funds, like Vanguard, State Street, and Blackrock, are now often the largest shareholders of U.S. companies. In this paper, we ask whether the growing importance of passive institutional investors has influenced activists.
We find, over the 2008-2014 period, that activists are more likely to pursue expensive activism campaigns when the target company’s stock has higher ownership by passively managed mutual funds.