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Economies of scope and optimal due diligence in corporate acquisitions

  • 1.  Economies of scope and optimal due diligence in corporate acquisitions

    Posted 10-01-2020 14:06

    How much due diligence should acquires undertake before finalizing corporate acquisitions. Based on advice of consultants, management gurus, and strategy textbooks, acquirers cannot be too diligent. All those sources concurred in warning acquirers: "Watch out!" This presentation of our study with Jeff Reuer sends a more specific and, therefore, a more accurate message. We place due diligence in the context of economies of scope present in M&As-from resource redeployment or from resource sharing-and we ask how diligent an acquirer must be with different economies and in different informational contexts. Relatedness, the key determinant of economies of scope, and ambiguity, the key determinant of incomplete information, are used to derive the optimal due diligence effort and the returns to the acquirer. The derived predictions qualify both the general appeal to extensive due diligence and the general recognition of the costliness of due diligence. These predictions can be tested in future empirical research on corporate acquisitions and may guide corporate acquirers on the optimal allocation of their due diligence efforts in the M&A market.

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    Arkadiy Sakhartov

    Gies College of Business

    University of Illinois at Urbana-Champaign


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