Due Diligence

Brendan Daley, Thomas Geelen*, Brett Green

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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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.
Original languageEnglish
JournalThe Journal of Finance
Volume79
Issue number3
Pages (from-to)2115-2161
Number of pages47
ISSN0022-1082
DOIs
Publication statusPublished - Jun 2024

Bibliographical note

Published online: 04 March 2024.

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