Due Diligence

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.