Industry Spillover Effect of Hedge Fund Activism on Organizational Exploitation and Exploration

Hedge fund activism has become a prominent organizational phenomenon that attracts increasing scholarly interest. To advance our understanding of the spillover effect of this phenomenon, this study develops a theory on the industry-wide spillover effects of hedge fund activism on non-targeted firms' focus on exploration vis-& agrave;-vis exploitation in technological innovation activities. In the empirical context of US-listed chemical firms from 2000 to 2015, we find that non-targeted firms exhibit a lower level of exploration relative to exploitation following hedge fund activism against their industry peers. Moreover, the industry spillover effect of hedge fund activism increases with the target firm's media coverage and decreases with the focal non-targeted firm's financial performance. These results support our theory and highlight the potential dark side of hedge fund activism on exploratory innovations in firms even if they are not directly targeted.