Wolves at the door to the unknown: Innovation search and hedge fund activism

In this paper, we develop and test a theory of how a firm's tradeoff between exploitation and exploration as alternative knowledge search strategies in innovation activities shapes the incidence of hedge fund activism as a consequential organizational phenomenon. In an analysis of U.S.-listed chemical companies between 2001 and 2018, we find that firms with a stronger commitment to exploration relative to exploitation are more likely to be targeted by activist hedge funds. Moreover, the positive relationship between knowledge exploration and targeting by activist hedge funds is more pronounced for firms with stronger exploitation capability and less pronounced for firms with stronger exploration capability. The implications of our findings for the theoretical development and practices of managing knowledge search in innovation activities are discussed.