How Does Hedge Fund Activism Reshape Corporate Innovation?

85 Pages Posted: 17 Mar 2014 Last revised: 5 Jul 2017

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

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: July 3, 2017

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 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

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? (July 3, 2017). Journal of Financial Economics (JFE), Forthcoming, 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 )

100 Fuqua Drive
Durham, NC 27708-0120
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European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Wei Jiang

Columbia Business School - Finance and Economics ( email )

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

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

NBER ( email )

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Song Ma (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
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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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