69 Pages Posted: 17 Mar 2014 Last revised: 17 May 2016
Date Written: May 16, 2016
This paper studies how hedge fund activism reshapes corporate innovation. Firms targeted by hedge fund activists experience an improvement in innovation efficiency during the five-year period following the intervention. Despite a tightening in R&D expenditures, target firms experience increases in innovation output, measured by both patent counts and citations, with stronger effects seen among firms with more diversified innovation portfolios. We also find that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation. Finally, additional tests refute alternative explanations attributing the improvement to mean reversion, sample attrition, management’s voluntary reforms, or activists’ stock-picking abilities.
Keywords: Hedge fund activism, Innovation, Resource allocation, Human capital redeployment
JEL Classification: G23, G34, O31
Suggested Citation: Suggested Citation
Brav, Alon and Jiang, Wei and Ma, Song and Tian, Xuan, How Does Hedge Fund Activism Reshape Corporate Innovation? (May 16, 2016). Available at SSRN: https://ssrn.com/abstract=2409404 or http://dx.doi.org/10.2139/ssrn.2409404