Due diligence can be thought of as investment homework. More formally, due diligence is the process of investigating all aspects of an investment in an effort to improve the confidence level of one's risk and return estimation. Those who have been involved in a corporate acquisition will probably be familiar with lengthy, detailed due diligence checklists ^[4] of documents, contracts, and financial schedules to be obtained and reviewed before a transaction is consummated. These lists contemplate that the target's management cooperates and shares information such as customer lists, detailed product cost and revenue information, all material contracts, asset value appraisals, analyses of litigation, internal projections, etc. These lists are designed to try to unearth every fact relevant to the transaction.

Investors would all prefer to have this comprehensive information, but, as a practical matter, much of it is nonpublic and management may not be compelled to share it with outsiders. ^[5] The general rationale for restricting the information given to investors (who, at the equity level, are the owners) is that such materials often include proprietary data that could hurt the firm's competitive position vis a vis other market participants if they were to obtain it. Thus, investment due diligence typically must be conducted within the context of having significantly less information than is typical in a full-blown corporate acquisition.