In conducting due diligence during corporate acquisitions, acquirers obtain new and
usually negative information regarding targets’ values. Because such
information is noisy, acquirers must balance the risk of withdrawing from a
value-enhancing acquisition against the risk of persisting with a value-destroying
acquisition. Drawing on signal detection theory, a rational choice theory of
decision making under uncertainty, we propose that the relative importance acquirers
place on these two risks affects how they utilize information obtained during due
diligence.To assess this proposition, we undertook an experimental study of decision
making in due diligence.The results are consistent with the assertion that the
initial value acquirers attach to the acquisition opportunity affects first the
impact that negative information from due diligence has on their valuations as well
as their final acquisition decisions.
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