How Does Hedge Fund Activism Reshape Corporate Innovation?

69 Pages Posted: 17 Mar 2014 Last revised: 17 May 2016

Alon Brav

Duke University - Fuqua School of Business

Wei Jiang

Columbia Business School - Finance and Economics

Song Ma

Yale School of Management

Xuan Tian

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2016

Abstract

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

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

Alon Brav

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Song Ma (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New Haven, CT 06511
United States

HOME PAGE: http://faculty.som.yale.edu/songma/

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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