Corporations have long played a central role in the development of science, producing foundational advances that have reshaped entire fields. Yet these contributions cannot be taken for granted. Over the past several decades, many corporations have retreated from scientific research. Observers have raised concerns that this shift may be linked to growing shareholder pressure to deliver near-term financial performance – pressures that could weigh heavily on scientific research because discoveries often generate spillovers that benefit other firms, and the path from discovery to commercial application is long and uncertain.
In a new article, we examine whether hedge-fund activism has contributed to this retreat and find that firms targeted by hedge funds shift innovation away from scientific research toward more commercial pursuits. Taken together, the evidence suggests that some of the governance forces credited with improving efficiency may also be accelerating the erosion of corporate science.
The Twin Trends in Corporate Governance and the Nature of Corporate R&D
Two trends provide the backdrop for our analysis.
First, the U.S. corporate governance landscape has shifted dramatically toward more active shareholder intervention. In the mid-20th century, corporations were largely characterized by diffuse ownership and limited shareholder monitoring. Over time, ownership became more concentrated, and institutional investors began to intervene more actively in pursuit of shareholder value. This shift reached a new phase with the rise of hedge fund activism, beginning in the mid-1990s. Compared with earlier forms of activism led by pension funds and mutual funds, hedge fund activism has proven far more effective at influencing management decisions. Hedge funds operate with fewer regulatory constraints, face fewer conflicts of interest, and compensate managers with powerful financial incentives – features that amplify their influence over corporate policies. Moreover, their relatively short investment horizons, averaging around two years, have raised concerns that they pressure managers to curtail long-term initiatives such as scientific research.
Second, corporate investment has increasingly tilted away from foundational scientific research. The share of total corporate R&D spending on research (i.e., the “R” of R&D) has dropped from about 30% in 1991 to around 21% in 2023, according to the National Science Foundation. Similarly, research shows that corporate scientific output –measured by the publication of knowledge-creating research – has fallen sharply, even as patenting and applied development activity have remained robust. This pattern does not suggest a general retreat from innovation, but a reorientation away from foundational science and toward applied development with more immediate commercial payoffs.
Are these two trends connected? If scientific research is particularly difficult to justify in the short term and under intense performance scrutiny, then growing pressure from powerful shareholders may disproportionately undermine firms’ willingness to invest in science.
The experience of DuPont suggests that this can be the case. For much of the 20th century, DuPont exemplified how patient investment in basic research could yield transformative breakthroughs, with its famed Experimental Station producing innovations such as Kevlar and nylon. That commitment to research came under severe strain following the aggressive activist campaign in 2014 by Trian Partners to “unlock shareholder value.” Central to Trian’s critique was DuPont’s substantial spending on research, which the fund characterized as yielding insufficient financial returns. The campaign was followed by leadership turnover, restructuring, and substantial cuts to research. While DuPont is a single case, it highlights a broader concern: When shareholder intervention intensifies, foundational scientific research – often time consuming, uncertain, and rich in spillovers to competitors – may be among the first activities to go.
Hedge Fund Activism
Our study uses two, complementary approaches to shed light on whether hedge-fund activism changes scientific research.
First, we examine scientific articles in academic journals across a broad range of public firms engaged in research. Published research captures the portion of scientific activity that generates knowledge spillovers – insights that expand collective scientific stock, feed downstream innovation, and are widely viewed as the primary source of science’s social benefits.
Using a difference-in-differences design that compares firms targeted by hedge funds with other similar firms, we find that hedge fund activism leads to a 14–20 % decline in the number of scientific articles over the subsequent five years. The decline is especially pronounced in high-impact journals, suggesting that activism eliminates not just low-quality or unproductive science, but also original and foundational research.
Second, we zoom in on the pharmaceutical industry, where the link between scientific research and social welfare is particularly clear and well documented. Advances in drug development have direct and measurable effects on health outcomes, and prior work shows that research-driven innovation – rather than incremental modification of existing products – is a primary source of therapeutic breakthroughs. Yet many observers have expressed concern that pharmaceutical firms increasingly allocate resources to variations of their top-selling drugs with limited, incremental benefits rather than to the development of new drugs and treatments.
We examine whether firms’ propensity to pursue novel rather than derivative drugs changes after activist campaigns. Pharmaceutical companies vary widely on this score. Some emphasize “me-too” drugs – compounds that are structurally similar to existing ones and often work in the same way – while others invest in genuinely novel drugs whose development requires substantial in-house scientific expertise. We classify potential drugs as novel or derivative using a standard measure of chemical similarity known as the Tanimoto score.
We find a striking shift in the nature of drug development following hedge-fund activism. Targeted firms pursue significantly fewer novel drugs and substantially more derivative ones, with no change in overall drug-development activity. This pattern mirrors our publication-based findings and reinforces the conclusion that hedge fund pressure systematically redirects corporate R&D away from foundational research toward more applied pursuits.
Policy Implications
Our findings have important implications for policy and corporate governance. There is broad consensus that markets underinvest in research because its social benefits far exceed its financial returns. Governments attempt to correct this shortfall through R&D subsidies, tax credits, and public funding. Our evidence suggests that, at least from the perspective of hedge funds, corporate research often yields insufficient returns, even with these policy interventions. To the extent that robust corporate science is socially desirable, our findings suggest a need to change innovation policy to reflect an evolving governance environment increasingly shaped by shareholder activism.
This concern is particularly relevant today. Public funding for science – especially for basic and exploratory research – is facing growing political and fiscal pressure. If both public and corporate sources of research weaken simultaneously, the long-run consequences for innovation and economic growth could be substantial.
Our results do not imply that shareholder activism is inherently harmful. Prior work shows that investor pressure can improve efficiency and stimulate applied innovation. Taken together, the evidence suggests a tradeoff: governance mechanisms that strengthen short-term discipline may also erode the conditions necessary for sustained scientific discovery. Understanding this tradeoff is essential as policymakers, firms, and investors grapple with how best to support innovation in an era of constrained public funding and increasingly activist shareholders.
Elia Ferracuti is an associate professor at Duke University’s Fuqua School of Business, Kevin Standridge is a visiting professor at the University of Utah’s David Eccles School of Business, and Rahul Vashishtha is a professor at Duke University’s Fuqua School of Business. This post is based on their recent paper, “Hedge Fund Activism and the Retreat from Corporate Science,” available here.