Target Selection by Activists and the Structure of Competition

Abstract

This chapter extends the model to include two potential targets for campaigns. Activists targeting firms in different industries are shown to be likely to focus on the firm with the weaker reputation or greater sensitivity to reputation. The latter finding rationalizes the practice of secondary targeting in which an activist targets a consumer-facing company that cares a lot about its reputation rather than the companies in its supply chain creating the harm. In the case of two potential targes in the same industry, the competitive interdependence between the two firms affects the targeting decision. When it is weak—e.g., when firms sell differentiated products—the activist tends to target the firm whose characteristics predispose it to engage in more private regulation than its rival (e.g., the more patient firm, the market leader). When competitive interdependence is strong—as in commodities industries—the activist targets the firm predisposed toward less private regulation.