Working Paper: NBER ID: w22273
Authors: Alon Brav; Wei Jiang; Song Ma; Xuan Tian
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 Codes: G23; G34; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hedge fund activism (G34) | Improvement in innovation efficiency (O36) |
| Hedge fund activism (G34) | Increase in patent counts (O34) |
| Hedge fund activism (G34) | Increase in citations (A14) |
| Hedge fund activism (G34) | Reallocation of innovative resources (O36) |
| Reallocation of innovative resources (O36) | Focus on core capabilities (D25) |
| Hedge fund activism (G34) | Active and efficient reallocation of outputs from innovation (O36) |
| Active and efficient reallocation of outputs from innovation (O36) | Increase in patent transactions (O39) |
| Hedge fund activism (G34) | Redeployment of human capital (J24) |
| Redeployment of human capital (J24) | Enhanced productivity of innovators (O36) |
| Hedge fund activism (G34) | Reduction in R&D expenditures (O39) |