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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.

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This paper discusses tradeoffs of various empirical methods used in recent papers that rely on Russell 1000/ 2000 index assignments for identification. The paper also addresses why different approaches to this identification appear to reach different conclusions about the effect of index assignment on firm's ownership structure and corporate policies.