Journal of Finance, Forthcoming
85 Pages Posted: 20 Nov 2020 Last revised: 1 Sep 2023
Date Written: July 20, 2023
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: Suggested Citation