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How does hedge fund activism reshape corporate innovation?

Alon Brav, Wei Jiang, Song Ma and Xuan Tian

Journal of Financial Economics, 2018, vol. 130, issue 2, 237-264

Abstract: This paper studies how hedge fund activism impacts corporate innovation. Firms targeted by activists improve their innovation efficiency over the five-year period following hedge fund intervention. Despite a tightening in research and development (R&D) expenditures, target firms increase innovation output, as measured by both patent counts and citations, with stronger effects among firms with more diversified innovation portfolios. Reallocation of innovative resources, redeployment of human capital, and change to board-level expertise all contribute to improve target firms’ innovation. Additional tests help isolate the effect of intervention from alternative explanations, including mean reversion, sample attrition, voluntary reforms, or activist stock-picking.

Keywords: Hedge fund activism; Innovation; Resource allocation; Human capital redeployment (search for similar items in EconPapers)
JEL-codes: G23 G34 O31 (search for similar items in EconPapers)
Date: 2018
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