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In this paper, we examine whether a failure-tolerant corporate culture spurs corporate innovation and increases firm value based on a sample of venture capital (VC) backed IPO firms. We develop a novel firm-specific measure of a failure-tolerant corporate culture hinging on the idea that the formation of corporate culture is largely determined by the attitudes and beliefs of its founders and early active investors. VC firms are such investors and their attitudes towards failures can have a profound impact on the formation of a failure-tolerant culture in the entrepreneurial firms in which they invest. We find that firms with a more failure-tolerant culture are significantly more innovative. The failure tolerance effect is persistent and robust to controlling for other VC firm characteristics. Further, the failure tolerance effect on firm innovation is stronger in industries in which innovation is more difficult to achieve. We also find opposite roles of insider equity ownership and failure tolerance in motivating innovation. Finally, we find that a failure-tolerant corporate culture increases firm value in industries in which innovation is important. Overall, our findings are consistent with implications in recent theories on corporate innovation that failure tolerance is critical in motivating innovation. Our work also contributes to the literature on corporate culture by making the first attempt at measuring a specific aspect of corporate culture and providing empirical evidence that corporate culture does matter in significant ways for firms' decisions and performances.

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We examine how a firm's incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases when beliefs are extremely high. We find that two mechanisms are at work: monitoring by investors and short-term executive compensation, both of which vary with investor beliefs about industry prospects. We also find that monitoring incentives of investors and underwriters differ. Our results are consistent with models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be vigilant for fraud during booms. Copyright (c) 2010 the American Finance Association.

We examine corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Firms that donate have operating characteristics consistent with the existence of a free cash flow problem, and donations are negatively correlated with returns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. Worse corporate governance is associated with larger donations. Even after controlling for corporate governance, donations are associated with lower returns. Donating firms engage in more acquisitions and their acquisitions have significantly lower cumulative abnormal announcement returns than non-donating firms. We find virtually no support for the hypothesis that donations represent an investment in political capital. Instead, political donations are symptomatic of agency problems within firms. Our results are particularly useful in light of the Citizens United ruling, which is likely to greatly increase the use of corporate funds for political donations.