This paper studies how hedge fund activism reshapes corporate innovation.
We find that firms targeted by hedge fund activists experience an improvement in innovation efficiency after intervention.
Despite reduction in R&D expenditures, target firms experience increases in innovation output (measured by both patent counts and citations), with stronger effects seen among firms starting with more diversified innovation portfolios. We further show that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation and lead to gains in efficiency. Finally, we establish that the link between hedge fund interventions and improvements in innovation efficiency is a by-product of asset reallocations triggered by activist interventions at the target firms.