Hedge fund activism often initially bolsters the target company but new research has found that it weakens the competition, which may hurt innovation and the larger economy.
"It is survival of the fittest," said Praveen Kumar, finance professor at the University of Houston and an author of a study published in the Journal of Financial Economics. "Yes, you do want the weakest competitors weeded out. But as they exit, there is less competition and hence, less incentive to innovate for the surviving firms. Over time, consumers and economic growth may be hurt."