M&A due diligence, post-acquisition accounting information, and financial consequences

This dissertation examines due diligence: a process that takes place in mergers and acquisitions (M&A) whereby acquirers obtain information that is used to determine the value of the net resources obtained from target firms. 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 test the relation between several observable features of the due diligence process and find it to be positively associated with target firms' information risk and acquisition-related litigation risk. I then link the extent of the effort acquirers put forth during due diligence to financial consequences of the transaction. Specifically, I find that deal premiums paid are lower when acquirers perform more due diligence, consistent with acquirers using valuable private information obtained from the target firm to negotiate a lower price. Results also suggest acquirers performing more due diligence are more likely to realize greater benefits after completing the transaction as a result of obtaining private information during due diligence. This is reflected in higher post-acquisition operating performance and long-term equity returns for acquirers that perform more due diligence.;I also examine how due diligence affects the accounting information about M&A transactions reported by acquiring firms in their post-acquisition financial statements. I find post-acquisition earnings to be more positively associated with returns when acquirers perform more due diligence. Results also 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. Taken together, these results are consistent with greater due diligence contributing to improved identification and measurement of the identifiable net assets acquired in M&A.