A recipe for technological innovation: Does hedge fund activism matter? A fuzzy set qualitative comparative analysis

• Author: Nouha Ben Arfa,Aymen Ammari,Stéphano Vacher
• DOI: http://doi.org/10.1002/jsc.2363
• Published date: 01 September 2020
• Date: 01 September 2020

RESEARCH ARTICLE

A recipe for technological innovation: Does hedge fund

activism matter? A fuzzy set qualitative comparative analysis

Stéphano Vacher

1

| Nouha Ben Arfa

1

| Aymen Ammari

2

1

ESTA School of Business & Technology,

Belfort, France

2

EM Strasbourg Business School, Strasbourg,

France

Correspondence

Nouha Ben Arfa, ESTA School of Business &

Technology, France, 3 Rue Fréry –CS 50199,

90 004 Belfort Cedex, France.

Email: nbenarfa@esta-groupe.fr

Abstract

Hedge fund activism and firm characteristics can be combined to explain targets'

engagements in innovative activities. The “difference in difference”regression frame-

work is first performed and shows that target firms experience an improvement in

innovation efficiency due to the presence of hedge funds (HFs) activists. The fuzzy

set Qualitative Comparative Analysis (fsQCA) perspective, is used, on the HF

activism-technological innovation relationship, which recognizes the existence of

conjunctural causation. The main sets from fsQCA leading to high/presence innova-

tion input/output display the presence of activist HFs combined to target mature

firms, low leveraged ones, firms performing structural changes, and/or those that

better refocus on their core innovation expertise and technologies in these areas.

KEYWORDS

activist hedge funds, difference in differences, fsQCA, technological innovation

1|INTRODUCTION

Shareholder activism has been discussed frequently in recent years

among professionals, regulators and researchers (Aslan & Kumar,

2016; Brav, Jiang, & Kim, 2015a, 2015b; Jory, Ngo, & Susnjara, 2017;

Krishnan, Partnoy, & Thomas, 2016; Norli, Ostergaard, & Schindele,

2014; Wang & Mao, 2015). Hedge funds (HFs) specializing in share-

holder activism are emerging as new players in terms of value creation

by triggering corporate change and intervening in management deci-

sions (Ben Arfa, Karmani, & Labaronne, 2017; Filatotchev &

Dotsenko, 2015). HF activism has attracted substantial public atten-

tion because of the increase in media coverage of HFs. HF activists

have been criticized for focusing on short-term value at the expense

of long-term gain. The concern reached a heightened level when Larry

Fink, Blackrock's chair and CEO sent a letter to corporations on March

31, 2015 to stress that “In the face of these pressures, more and more

corporate leaders have responded with actions that can deliver imme-

diate returns to shareholders, such as dividend increases, while under-

investing in innovation, skilled workforces or essential capital

expenditures necessary to sustain long-term growth”. Indeed, the

question of HF activism engaging in innovative activities that lead to

long-term gain was highlighted recently in the case of Starboard Value

(founded by Jeffrey Smith) and AOL (selling patents to Microsoft).

“Starboard wrote in a letter sent to AOL board on February 24, 2012,”

Starboard Value projected that the portfolio of patents would gener-

ate more than $1 billion of licensing income if adequately managed.

The fund proceeded by proposing, during the 2012 annual AOL board

meeting, the board's election of five of its directors. As a result of

Starboard's activism, AOL share prices increased 40% after AOL

agreed to grant Microsoft a nonexclusive license to the more than

300 patents and patent applications the company chose to retain,

having sold 800 patents to Microsoft. U.S. HFs have recently been

exerting growing activist pressure on French firms to engage in inno-

vative activities, for example, TCI blamed Safran on the fear of poor

capital allocation at the company and calls on fixing design problems

with a new engine.

Ascorporateinnovationismainlyconcentratedintechnological

areas that are central to the core capabilities of the target firms

(Brav, Jiang, Ma, & Tian, 2018), the answer to the following question is

expected: Does HF activism drive technological innovation in French

target firms? A study covering a total population of 33 French listed

firms from 2004 to 2014 is conducted using a fuzzy-set Qualitative

JEL classification codes: G23, G34, O31.

DOI: 10.1002/jsc.2363

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