The Disadvantage of Incomplete Performance Feedback: Evidence from Private Equity–Backed Buyouts

Abstract

We develop and test a theory of how organizations learn from performance feedback in the context of strategic decisions, where delayed outcomes result in performance feedback that is incomplete. In this context, firms facing a focal decision observe performance feedback for only a subset of their previous decisions. Using a sample of 7,223 private equity buyout investments, we find that incomplete performance feedback has a negative impact on the performance of a subsequent decision. Our results also suggest that incomplete performance feedback creates challenges when firms engage in problemistic search, reducing the well-established benefits of search for firm future performance. Moreover, this mitigating effect of incomplete feedback is stronger when performance falls below rather than exceeds aspirations.

Keywords: performance feedback, behavioral theory, aspirations, buyouts, private equity