Hedge fund activism can have positive longer-term effects on companies, says new research
Activist hedge fund investors can deliver positive results for companies, according to new research from Columbia Business School's Professor Wei Jiang, Arthur F Burns Professor of Free and Competitive Enterprise.
Examining the effects of hedge fund interventions specifically on corporate innovation, Jiang reveals that third-party interventions can actually increase the longevity and sustainability of a company's innovation – particularly with inventors and inventions. Hedge fund activism leads to companies using R&D dollars more efficiently, contradicting commonly held beliefs that hedge fund activism focuses companies on unsustainable short-term goals.
"We can no longer say that third-party activism has a one-size-fits-all result," says Professor Jiang. "It is relatively easy to analyse hedge fund activism on the short-term effects; but considering how activism can actually work in the long run is more of a challenge. The evidence shows that in the case of corporate innovation, hedge fund activists can help companies become leaner, more focused, and more efficient in their innovation."
The study, How Does Hedge Fund Activism Reshape Corporate Innovation?, co-written by Professor Alon Brav of Duke University's Fuqua School of Business, Assistant Professor Song Ma of Yale School of Management, and Professor Xuan Tian of Tsinghua University's PBC School of Finance, was recently published in the Journal of Financial Economics. The researchers analysed publicly traded companies listed on the NYSE from 2000 – 2013 that have been targeted by hedge funds, measuring their innovation activities before and up to five years after hedge fund intervention, a process defined by trimming unproductive and peripheral assets, unbundling business segments, and opposing diversifying acquisitions. The study uses both R&D expenditures and patenting activity to evaluate the innovation process, finding an increase in output of patent quality and quantity metrics following intervention.
"Rather than fearing third-party involvement, investors should recognise the positive long-term effects of hedge funds on innovation potential," Jiang says. "Research shows that companies' patent sales increase after hedge fund activism, and lead to the arrival of new inventors who strengthen the core competence of the company. Hedge fund activism should be seen as a catalyst, not a calamity."