One of the central ideas of Performance Feedback Theory is that organizations regulate their behavior with the help of performance feedback. One implicit assumption underlying this idea is that performance feedback received by the organization is a diagnostic signal of the true underlying performance of their actions. However, in many situations, performance feedback regarding organizational actions is noisy due to contemporaneous uncertainty. In this paper we argue that noise in performance feedback may give rise to inappropriate reinforcement of organizational actions, especially in situations where the information environment is relatively unfamiliar and when the information processing demands for the organization are high. Exploiting stock market returns surrounding acquisitions, which allow us to separate and quantify noise from the performance feedback signal, we find supporting evidence for our theoretical conjectures. Taken together, our results highlight the important role of noise in processing of performance feedback and paint a picture of organizational decision-making that is informationally less sophisticated than prior research in M&A would assume.
