Abstract:
Passive exchange-traded funds (ETFs) mechanically replicate the indices they track and therefore lack discretion in responding to takeover offers. Unlike other shareholders, they cannot weigh the benefits and risks of the offer; their ability to tender shares depends entirely on index providers' decisions during the offer period. Using a large sample of German takeover offers, this study documents that passive ETF ownership has a two-sided effect on offer success. First, when no index adjustments occur, ETFs are unable to tender their holdings, producing a significantly negative baseline effect on offer outcomes. A one-percentage-point increase in pre-offer passive ETF ownership reduces the fraction of shares acquired by 5.93 percentage points in the full sample and by 8.03 points for control-taking offers with a bidder toehold below 30%. Second, when index providers adjust the target's index weight during the acceptance period-either through ordinary or extraordinary revisions to the stock's weight or through its entire removal from the index-ETFs are forced to divest. These downward adjustments positively affect offer success, especially when combined with a positive target management recommendation: For indices maintained by Deutsche Börse AG, downward revisions significantly mitigate the negative baseline effect in the subsample of control-taking offers and fully offset it in the full sample.
