Searching for Google’s Value:
Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering
Joyce E. Berg
George R. Neumann
Thomas A. Rietz*
IPO underpricing is endemic. Many theories have been developed to explain it. To inform theory and to investigate the practical application of prediction markets in an IPO setting, we conducted markets designed to forecast post-IPO valuations before a particularly unique IPO: Google. The combination of results from these markets and the unique features of the IPO help us distinguish between underpricing theories. The evidence leans against theories which require large payments to buyers to overcome problems of asymmetric information between issuers and buyers. It is most consistent with theories where underpricing is in exchange for future benefits. The prediction market results also show that it is possible to forecast post-IPO market values and, therefore, avoid losses associated with underpricing when a firm wishes to do so.
JEL Classification Codes: C53, C93, G10, G14, G24, G32
Keywords: Initial public offering, underpricing, asymmetric information, prediction markets
Berg: Department of Accounting; Neumann: Department of Economics; and Rietz: Department of Finance; Tippie College of Business, University of Iowa, Iowa City, Iowa 52242-1994. IEM Price data used in this paper are available at http://www.biz.uiowa.edu/iem/. We thank Thomas George, Bruce Johnson, Thomas Noe participants at the University of Iowa Accounting and Finance Department workshops, and the members of the IEM project team, especially Forrest D. Nelson, for their many insightful comments and suggestions.
Thomas A. Rietz Department of Finance University of Iowa
Phone: 319-335-0856 Fax: 319-335-3690 e-mail: Thomas-Rietz@uiowa.edu