Checking the Closet for Skeletons: The Length of the Due Diligence Process in Technology Acquisitions

Drawing on information economics, we explore how the levels of uncertainty regarding the value of a target’s resources and information asymmetry between the acquiring and target firms impact the acquirer’s due diligence effort. We capture uncertainty and information asymmetry by the number of pending patent applications of target firms and the technological distance between the two firms’ patenting activity, respectively. Using a longitudinal study on technology acquisitions in the UK, we find a significantly positive effect of targets’ pending patent applications on due diligence length which is also amplified by technological distance. Our study contributes to the M&A literature by revealing that higher information asymmetry and uncertainty lengthen the due diligence process of the acquirers in order to effectively evaluate prospective target firms.