Hedge Funds and Corporate Innovation

Using NBER patent data and hedge fund holdings in U.S. firms during 1998-2006, we study the effect of hedge fund ownership on corporate innovation. We find that hedge fund ownership promotes both patent quantity and quality, even after controlling for endogeneity. This stimulating effect is more pronounced for hedge fund blockholdings. Hedge funds appear to benefit innovation by enhancing R&D productivity and innovation efficiency rather than increasing R&D input. Consequently, hedge fund ownership increases firm value via its positive effect on innovation. Our study suggests another channel through which hedge funds may enhance firm value, thus contributing to the literature on hedge fund ownership and the debate regarding whether hedge funds should be regulated.