How Does Hedge Fund Activism Reshape Corporate Innovation?

70 Pages Posted: 24 May 2016 Last revised: 26 Mar 2021

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; National Bureau of Economic Research (NBER)

Xuan Tian

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 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.

Suggested Citation

Brav, Alon and Jiang, Wei and Ma, Song and Tian, Xuan, How Does Hedge Fund Activism Reshape Corporate Innovation? (May 2016). NBER Working Paper No. w22273, Available at SSRN: https://ssrn.com/abstract=2783187

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

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Wei Jiang

Columbia Business School - Finance and Economics ( email )

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Song Ma

Yale School of Management ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Xuan Tian

Tsinghua University - PBC School of Finance ( email )

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China
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HOME PAGE: http://xuantian.info/

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