Innovation after Failure

Abstract

Although innovation failures are inevitable, common, and even praiseworthy, it remains unclear how an innovation failure affects a firm's innovation search. In this paper, we theorize when shareholders' monitoring is low and thus they are more likely to attribute bad luck to poor managerial skills, managers are driven to increase innovation intensity upon failure to compensate for the observed low performance. By exploiting late simultaneous patent applications as exogenous failures in the difference-in-differences framework, we find evidence consistent with our theory. We additionally document the direction, outcomes, and financial consequences of innovation search upon failure. In sum, we show that Thomas Edison's famous remark,