Study: Activist Investing Spurs Innovation in Targeted Companies

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Third-party interventions can actually increase the longevity and sustainability of a company’s innovation

A research study by  Columbia Business School’s Professor Wei Jiang shows that activist investors help the cause of innovation in their companies. Prof Jiang is the Arthur F. Burns Professor of Free and Competitive Enterprise at the University.

Activist investors have a somewhat negative and self-centered image in the media. They are also shown to focus on short-term pecuniary benefits from their campaign, leaving their targets stripped, and employees laid off. The study by Professor Jiang, however, reveals a lesser-known but positive effect these so-called corporate marauders have on companies on their beat.

Activist investing and innovation

The study How Does Hedge Fund Activism Reshape Corporate Innovation? shows that these companies use R&D dollars more efficiently – a definitely longer-term benefit.

“We can no longer say that third-party activism has a one-size-fits-all result,” said Professor Jiang. “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,” he says.

However, assessing the longer-term benefits of activist intervention is much more difficult than evaluating its immediate impact, Prof Jiang admits.

Long-term boost to innovation by activist investing

Hedge fund activism may result in reallocation of innovative resources, redeployment of human capital, and change to board-level expertise. Over the following five years, these factors help target firms improve their innovation efficiency.

In fact, despite tighter R&D budgets, the companies increase innovation output, as measured by both patent counts and citations.

Further, the research shows that patent sales increase. Moreover, this leads to the advent of new innovators who can boost technological expertise at the company.

“Hedge fund activism should be seen as a catalyst, not a calamity,” suggests Prof. Jiang.

[Related Story:  Carl Icahn Takes Stake in HP, Pushes for Xerox Merger     ]

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