How Does Hedge Fund Activism Reshape Corporate Innovation?

How Does Hedge Fund Activism Reshape Corporate Innovation?

Andrew Ellul, Alon Brav

December 17 2017

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.

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