Governance monitors or market rebels? Heterogeneity in shareholder activism

Agency theory is the dominant theory of shareholder activism and argues that activist investors function as external governance monitors. Agency theory predicts that activist investors will tend to target firms who exhibit governance and performance problems. However, given limited resources and time, activist investors must often decide between selecting targets with particularly strong agency and performance problems and those where their activism efforts are most likely to succeed. Social movement scholars point out that, in social movement contexts, the corporate opportunity structure affects when and where activism is likely to arise. We draw on insights from social movement scholarship and agency theory to advance a theory of heterogeneity in shareholder activism. We argue that an activist’s access to power and resources shapes its target selection, particularly the activist’s preference for targeting firms with greater agency problems or where contextual factors favor chances of success. Whereas more powerful activists are able to wield their power as effective governance monitors against firms with substantial agency problems, less powerful activists must strategically select targets of opportunity by choosing firms where contextual factors improve their odds of success. We test these propositions using an innovative relational approach that can simultaneously incorporate firm traits, activist identities, and endogenous dynamics.