Tolerance for Failure and Corporate Innovation

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ID: 301869
2011
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Abstract
Based on a sample of venture capital (VC)-backed IPO firms, we examine whether tolerance for failure spurs corporate innovation. We develop a novel measure of VC investors' failure tolerance by examining their willingness to continue investing in underperforming ventures. We find that IPO firms backed by more failure-tolerant VC investors are significantly more innovative and VC failure tolerance is particularly important for ventures that are subject to high failure risk. We show that these results are not driven by endogenous matching between failure-tolerant VC firms and start-ups with high ex ante innovative potential. We also examine the determinants of the cross-sectional heterogeneity in a VC firm's failure tolerance. We find that both capital constraints and career concerns can negatively distort a VC firm's failure tolerance. Less experienced VC firms are more exposed to these distortions, making them less failure tolerant than are more established VC firms.
Reference Key
openalex_W3123695678 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Xuan Tian, Tracy Yue Wang
Journal review of financial studies
Year 2011
DOI
10.1093/rfs/hhr130
URL
https://doi.org/10.1093/rfs/hhr130
Keywords Keywords not found

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