M&A Due Diligence, Post-Acquisition Performance, and Financial Reporting for Business Combinations

Abstract

Before completing an M&A transaction, acquiring firms conduct due diligence. This process provides acquiring firms with a more informed assessment of the expected costs, benefits, and risks of an acquisition and offers one last opportunity to renegotiate or terminate an M&A transaction. However, acquiring firms must trade off the costs and benefits of performing additional due diligence versus completing the acquisition. Based on an analysis of the time to negotiate the acquisition agreement and complete the transaction, I predict and find that competitive pressures, short-term financial reporting incentives, and agency problems are associated with less due diligence. I also find that less due diligence is associated with lower post-acquisition profitability, a higher probability of acquisition-related goodwill impairments, and lower quality fair value estimates for the acquired assets and liabilities. These findings highlight due diligence as an important factor explaining cross-sectional variation in post-acquisition performance and financial reporting for business combinations.

Keywords: Mergers and acquisitions; due diligence; post-acquisition performance; goodwill; fair value

JEL Classification: D82, G34, M41