Hedge Fund Activism, R&D Efficiency and Firm Value

We examine whether hedge fund activists correct inefficient R&D investment and create long-term value at their targets. Using an endogenous growth model to estimate the efficient level of R&D investment, we find firms targeted by activists are overinvesting in R&D on average, with both the likelihood of being targeted and activism announcement returns increasing in the degree of R&D overinvestment. Despite observing a significant cut in R&D expenditure at target firms in the post-activism period, we find no evidence suggesting that hedge fund activists correct inefficient R&D investment. Further tests highlight a negative impact of hedge fund activism on value creation, after controlling for the activist’s stated objectives, reputation, and stock selection ability