Delayed Learning from Failure: The Role of Vicarious Learning in Market Exit Decisions

Abstract

Firm decisions to abandon previously adopted practices are complicated by difficulties of interpreting their own failure experiences with the practice. This study examines whether and how firms arrive at abandonment decisions by combining their own performance information with vicariously learned failure and success information of other firms. We argue that others’ abandonment decisions confirm the focal firm's own poor performance information -- suggesting that the market lacks inherent value -- thereby increasing its market exit rate. Others’ post-entry success performances exert more complicated effects: A small number of successes can imply that the value of market participation varies across firms such that the focal firm, too, may be more successful in the future. As a result, the focal firm’s exit decision is delayed. In contrast, high numbers of others’ successes will increase the exit rate of the focal firm. We test our theories in the context of market exit decisions by the whole population of 1...