How does hedge fund activism reshape corporate innovation?

We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind-the-scenes intervention as well as governance-motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.

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“…(), Brav, Jiang, and Kim (), Bebchuk, Brav, and Jiang (), Brav et al. (), and Gantchev, Gredil, and Jotikasthira ().…”

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confidence: 99%

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

McCahery¹,

Sautner

Starks

2016

The Journal of Finance

996

421

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“…Aslan and Kumar () show that although HFAs improve production efficiency, their industry rivals also experience these improvements. Brav et al () investigate the effects of HFAs on a firm's innovation. They show that firms increase innovation efficiency during the five years after the activism event.…”

Section: Literature Reviewmentioning

confidence: 99%

“…For example, Brav, Jiang, and Kim (2015) focus on hedge fund activists (HFAs) and find that HFAs enhance firm productivity and increase firm focus. In Brav et al (), HFAs increase innovation efficiency. Additionally, Bebchuk, Brav, and Jiang (2015) find no evidence that HFAs reduce firm operating performance in the long term.…”

Section: Introductionmentioning

confidence: 99%

The Effects of Activist Investors on Firms’ Mergers and Acquisitions

Swidler

Trinh

Yost

2019

J of Financial Research

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We investigate the effects of activist investors on firm acquisitions, where activist investors include both hedge fund activists and entrepreneurial activists (venture capital funds, private equity funds, and individual investors). For completed deals, acquirers with activist investors experience significantly higher announcement cumulative abnormal returns compared to acquirers without activist investors. In addition, acquirers with activist investors are more likely to withdraw from value‐destroying transactions. Furthermore, the market reacts more favorably to acquirers with activists than to those without activists when these value‐destroying transactions are withdrawn. Our results highlight the role of activist investors in aligning managers’ and shareholders’ interests in acquisition decisions.

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“…While R&D may be viewed as a key input to generating productivity gains, some evidence suggests that firm innovation performance may be closely tied to resource allocation and manager incentives. Brav et al (2018) assess the effect of hedge fund activism on corporate innovation using difference-indifferences models that compare treatment firms (those targeted by hedge fund activism) and matched control firms (not targeted), with data from 1991 to 2010. They find that R&D spending fell among target firms by about 20% on average, compared to control firms during the five-year post-intervention period.…”

Section: Effect Of Finance On Productivity Through Randdmentioning

confidence: 99%

Finance and Productivity: A Literature Review

Heil

2018

Journal of Economic Surveys

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This paper surveys a broad range of studies and highlights the main findings of the empirical literature regarding business finance and productivity. Numerous studies analyse the productivity effects of financial development and frictions. The results suggest the following: (1) Financial development likely has favourable effects on productivity growth, (2) financial frictions that impede the efficient flow of finance can mitigate the positive effects through a variety of channels and (3) the magnitudes of productivity costs of financial frictions generally appear modest in financially developed economies but are considerably larger in developing economies. The paper also reviews studies of the influence of specific mechanisms on productivity, such as human capital, corporate finance, financial sector efficiency, equity finance and venture capital. Some policies that hamper productivity growth include inefficient insolvency regimes that impede exit of low‐productivity firms, poorly developed contract monitoring and enforcement systems between banks and firms, collateral constraints that impair resource reallocation and imperfect bank supervisory practices that diminish productive capital reallocation through distorted lending practices.

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How does hedge fund activism reshape corporate innovation?

Cited by 393 publications

References 58 publications

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

The Effects of Activist Investors on Firms’ Mergers and Acquisitions

Finance and Productivity: A Literature Review

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