It is widely believed that M&A due diligence enables
acquirers to better understand what they are buying
before bearing the risks of ownership. I measure due
diligence empirically and find it to be positively
associated with target firm information risk and
acquisition-related litigation risk. Results indicate
that reported fair value estimates of acquired assets
and assumed liabilities by acquirers performing more due
diligence are reflected to a greater degree in equity
investors‟ post-acquisition valuation of acquirers.
Moreover, acquirers performing more due diligence are
less likely to recognize post-acquisition goodwill
impairments. This result is consistent with greater due
diligence contributing to improved identification and
measurement of the identifiable net assets acquired in
M&A.
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