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

Appel, I., Gormley, T. A., & Keim, D. B.

Research Retrieved: June 29th, 2016 (PDF below) or get the latest version on SSRN


Shareholder activism is on the rise again after a temporary decline in the number of activist campaigns throughout the financial crisis. With 343 recorded activist campaigns in 2014, the movement reached its peak since 2008 (see PwC study, 2015). Simultaneously, the extent to which firms are owned by passive investors keeps increasing. In a recent working paper, Appel, Gormley and Keim (2016) investigate the impact of passive ownership on the way that activist shareholders target mutually owned companies.

Key Findings

Appel, Gormley and Keim (2016) find that passive ownership matters: the larger the percentage of shares held by passive investors in a firm, the more likely the firms become the target of aggressive campaigns with the aim to obtain corporate control as for instance through the attainment of board representation. At the same time, activists seem to forego opportunities to change undesirable corporate governance through less costly mechanisms such as shareholder proposals if a large share of passive shareholders is present in the targeted firm. Based on this finding, it seems that activists refrain from seeking change in targets through public shareholder proposals if mutual owners of target firms are absent-minded or hard to activate for campaign-related vote support. This outcome might be economically undesirable, since shareholder proposals are easier and less expensive to organize and can steer change at an earlier stage compared to large-scale activism campaigns.

Practical Relevance

Future research still has to back the intuition about what causes the outlined differences in activist behavior with evidence. Yet, the insight that the presence of passive ownership effectively influences activist behavior stresses the importance and responsibility of large long-horizon institutional investors (or asset owners). Even if those investors intend to take a neutral stance on the management of the firm, they appear to incur changes in the behavior of mutual owners. Hence, the results should make large, passive investors aware of their natural impact on outside corporate governance.