Due Diligence

Brendan Daley, Thomas Geelen, Brett Greenouis

Research output: Contribution to conferencePaperResearchpeer-review


Due diligence is common practice prior to the execution of corporate or real estate transactions. We propose a model of the due diligence process and analyze its effect on prices, payoffs, the likelihood of deal completion, and the distribution of completion times. In our model, if the seller accepts an offer, the acquirer has the right to gather information and chooses when to execute the transaction. Our main result is that the acquirer engages in “too much” due diligence relative to the social optimum. Nevertheless, allowing for due diligence can improve both total surplus and the seller’s payoff compared to a setting with no due diligence. The optimal contract involves both a price contingent on execution and a non-contingent transfer, resembling features such as earnest money or break-up fees that are commonly observed in practice.
Original languageEnglish
Publication date2022
Number of pages64
Publication statusPublished - 2022
EventThe 82nd Annual Meeting of American Finance Association. AFA 2022: Part of the ASSA 2022 Virtual Annual Meeting - , WWW
Duration: 7 Jan 20229 Jan 2022
Conference number: 82


ConferenceThe 82nd Annual Meeting of American Finance Association. AFA 2022
Internet address


  • Due diligence
  • Learning
  • Takeovers
  • Mergers and acquisition

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