Due Diligence

Journal of Finance, Forthcoming

85 Pages Posted: 20 Nov 2020 Last revised: 1 Sep 2023

See all articles by Brendan Daley

Brendan Daley

Johns Hopkins University

Thomas Geelen

Pennsylvania State University - Smeal College of Business; Copenhagen Business School - Department of Finance; Danish Finance Institute

Brett Green

Washington University in St. Louis - John M. Olin Business School

Date Written: July 20, 2023

Abstract

Due diligence is common practice prior to the execution of large transactions. We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the acquirer has the right to gather information and chooses when to execute the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest the magnitude of the distortion is economically significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller’s payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and break-up fees.

Keywords: Due Diligence, Learning, Takeovers, Mergers and Acquisitions.

JEL Classification: C7, D4, G0

Suggested Citation

Daley, Brendan and Geelen, Thomas and Green, Brett, Due Diligence (July 20, 2023). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3702560 or http://dx.doi.org/10.2139/ssrn.3702560

Brendan Daley

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Thomas Geelen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Danish Finance Institute ( email )

Brett Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
932
Abstract Views
2,978
Rank
48,185
PlumX Metrics