Does the Rise of Passive Investors Facilitate Hedge Fund Activism? An Empirical Analysis of Target Firm Value and Operating Performance

Sammanfattning: Recent years have witnessed a concurrent development in U.S. stock ownership with a growing presence of passive investors and an increasing activity of hedge fund activism. This thesis addresses the question whether this development is related, and more specifically, whether the growth of passive investors facilitates hedge fund activism. Using a comprehensive sample of 1,641 activist hedge fund campaigns in the U.S. from 2000 to 2015, we study the long-term effect of passive ownership on the value and operating performance of firms targeted by activist hedge funds. Based on univariate and multivariate analyses, our findings indicate that target firms with a low level of passive ownership tend to outperform target firms with a high level of passive ownership, both in terms of changes in firm value and operating performance. However, we find no statistical support that this tendency for outperformance is attributable to the level of passive ownership. In particular, we find no support for the claim that activist hedge funds would be more successful in creating value and improving the operations in target firms where the level of passive ownership is high.