How Hedge Fund Activism Leads Companies Away From Basic Research

In 2014, DuPont, “one of America’s most storied research-driven corporations,” became the target of an activist campaign. The company’s reputation as an innovation powerhouse – where Kevlar and nylon were invented – met demands of greater efficiency in the name of increasing shareholder value. After a prolonged fight that ended with the removal of its CEO, the company proceeded with layoffs and cuts to research spending, marking a strategic turning point and weakening the company’s famed “Experimental Station.”

The DuPont case was not an isolated episode, according to new research by professors Elia Ferracuti and Rahul Vashishtha of Duke University’s Fuqua School of Business and Kevin Standbridge of the University of Utah, but part of a broader pattern in which activist hedge funds target firms’ scientific research efforts.

In their paper, “Hedge Fund Activism and the Retreat from Corporate Science,” the researchers examined several years of hedge fund-led activist campaigns aimed at “research-active” firms. They found that these campaigns are frequently followed by a retreat from high-impact research and a shift to less novel and more derivative inventions.

But withdrawing from foundational research may have broader negative implications for society.

“If we don't develop the fundamental knowledge base, how are we going to solve practical problems?” Vashishtha said. 

U.S. corporations as innovation engines

Corporate research labs have historically played a central role in American innovation, from semiconductors to pharmaceuticals to materials science. Recent data suggests that corporate R&D accounts for “nearly 35% of basic research and 62% of applied research in the United States.” 

When firms reduce investments in basic research, the consequences extend beyond shareholders, the authors explain, because scientific research produces spillovers—knowledge that benefits other firms, industries, and ultimately the whole society.

“When scientists were studying an enzyme that regulates cholesterol metabolism, they didn’t have a specific solution in mind,” Ferracuti said, “but that discovery opened the door to statins.” 

Why scientific research is vulnerable to activist pressure

Hedge funds pool capital from wealthy individuals and institutions to pursue aggressive strategies aimed at generating high returns. Activist hedge funds usually buy stakes in publicly traded companies and then push for changes they believe will raise share prices.

“What sets hedge funds apart from other institutional investors is their ability to shape corporate policies,” Ferracuti said.  Unlike mutual funds and pension funds, hedge funds face fewer regulations, giving them more flexibility to take bigger risks. They also pay their managers based heavily on performance, creating strong incentives to push for quick results, the authors explained.

Moreover, hedge funds typically hold their investments for relatively short periods—often just a few years, the researchers write. The high-powered incentives to generate financial returns along with short horizons can create tension with certain types of corporate investment. Basic scientific research is particularly exposed because its payoff horizon is long, its outcomes are highly uncertain, and many of its benefits spill over to other firms rather than being fully captured by the innovator.

Measuring corporate research

To investigate their hypothesis—that intense pressure from hedge fund activists causes firms to retreat from foundational scientific research—the authors first had to identify a way to measure corporate science (a challenging task, because firms do not disclose their spending on basic research).

Drawing on earlier work by Fuqua’s Ashish Arora and Sharon Belenzon, the researchers used the number of publications in academic journals as a proxy for corporate research.

“Publications provide a reliable indicator of the socially valuable component of corporate science,” Vashishtha said. 

Using this measure, the authors investigated whether firms’ publications in academic journals change after a hedge fund activism event.

The aftermath of hedge fund activist campaigns

The authors examined 639 hedge fund-led activist campaigns across two decades, targeting 487 research-active firms across a wide range of industries. They tracked firms for five years following the activist campaign to observe medium-term changes in research behavior. The study found that after activist campaigns, targeted firms reduce their production of scientific publications by roughly 20 to 30 percent within five years, with the steepest declines concentrated in high-impact journals—the outlets most associated with scientific advances.

The change is not driven by firms abandoning innovation altogether, the authors explain, but its content shifts. Companies become less likely to pursue basic research (as measured by publications in academic journals) but continue to develop applied technologies, as reflected in the relatively stable level of patent filings. This reorientation leads firms to favor more incremental inventions.

 “It’s a reorientation away from the discovery of new scientific knowledge and toward the application of existing scientific knowledge,” Ferracuti said.

Original drug applications drop, copycat drugs rise

A concern in the study was that the decline in scientific publications might merely reflect changes in the publication of research—meaning firms were still conducting research but had stopped publishing to protect trade secrets.

The pharmaceutical industry offered a setting to rule out this possibility, by allowing the researchers to measure scientific activity through drug candidate applications, in a setting where discovery is risky, slow, and expensive.

After activist interventions, the study found that pharmaceutical firms are less likely to pursue truly novel drug candidates, reducing their application for original compounds by 31%.

Instead, companies gravitate toward “me-too” drugs—chemically derivative compounds that face lower scientific uncertainty. These products can be profitable, but they rarely open new therapeutic frontiers. The authors found that following activist events, pharma companies increased “me-too” drugs by 133 percent in the following five years.

 “The result is a research portfolio that looks safer and more predictable, but also narrower in its long-term potential,” Vashishtha said.

The tension between short-term pressure and long-term science

The paper does not argue that hedge fund activism is inherently harmful. “The monitoring function that hedge funds exercise creates value and improves efficiency,” Ferracuti said. In many cases, activist campaigns lead to increases in the number of applied innovation patents–as studied by Fuqua’s Alon Brav. The problem arises when the same strategy is applied to companies whose value depends on uncertain, long-run research.

“There is a mismatch between activists’ short-time horizons and the nature of scientific innovation,” Vashishtha said. 

The findings emphasize the importance for corporations to clearly communicate the strategic value of basic research. Firms that cannot articulate why long-term science matters may find it harder to defend those investments under pressure.

“Make sure you have a shareholder base which is very educated, and a board that is committed to your research program,” Vashishtha said. “Then, when the hedge fund comes in, you have a better chance of preserving your strategy.”

The study raises broader questions about the governance of innovation. If financial markets systematically discourage corporate science, public funding and institutional safeguards may become more important in sustaining foundational research.

“It also highlights the importance of protecting research that comes from universities,” Vashishtha said. “You don't want to interfere with capital markets, so the very least you can do is allow universities to pursue their research mission.”