How Does Pre-Entry Experience Enhance Entrant Performance? Evidence From Learning Curves of New Banks

Abstract

Extant theory holds that new entrants’ pre-entry experience is an important asset that enhances their post-entry performance. While the logic is compelling, empirical findings have been inconsistent. We argue that this gap results, in part, because the empirical literature tends to confound two distinct mechanisms. Pre-entry experience may act: (a) directly by increasing an entrant’s post-entry performance (silver spoon effect) and (b) indirectly by influencing the properties of new entrant learning post-entry (helping hand effect). This latter mechanism has received sparse attention in the literature. We build on prior work on learning curves to develop a theory of how pre-entry experience impacts the rate and asymptote of post-entry learning curves, and how context dissimilarity bounds the relationship. We test the theory using a longitudinal census of new entrants in U.S. commercial banking. In the absence of accounting for the indirect effect, our estimates show that pre-entry experience appears to be performance reducing for new entrants. We then estimate models in which we account for post-entry learning curves. We find strong support for the positive implications of pre-entry experience — it improves new entrant performance at entry by 12.5 percent via the direct effect, and increases an entrant’s post-entry experiential learning rate by 211 percent via the indirect effect.