Journal of Finance Vol. 79 No. 3 2024

Due Diligence

Brendan Daley^1,2,3,4,5,6; Thomas Geelen⁷; Brett Green^1,2,3,4,5,6

¹ Johns Hopkins University · ² Copenhagen Business School · ³ Washington University in St. Louis · ⁴ Cornell University · ⁵ Johns Hopkins University Applied Physics Laboratory · ⁶ HEC Paris · ⁷ e-mail: [email protected]

Abstract

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 winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that 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 breakup fees.

DOI

10.1111/jofi.13322

Volume

79

Issue

3

Pages

2115-2161

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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