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from Google’s prospectus and information released by investors after the IPO. This will provide evidence

about whether the prices in our prediction market could have been market clearing IPO prices for Google.

3. The Iowa Electronic Markets Google IPO Markets

Though other markets have a predictive component (e.g., futures markets), prediction markets

are designed specifically for forecasting purposes. Contracts in prediction markets have payoffs tied

directly to a future event of interest (in this paper, Google’s eventual market capitalization) and the

markets have design features that encourage revelation of true underlying expectations. Prices in

prediction markets provide forecasts about features of the associated event, for example its probability of

occurring or the consequences of its occurrence. The most well-known prediction markets are the Iowa

Electronic Markets (IEM for short, reviewed in Berg, Forsythe, Nelson and Rietz, 2003), which have been

used for more than 17 years to forecast election outcomes, other political and economic events, prices and

returns of stocks, corporate earnings and movie box office receipts. These real-money, small-scale

markets have proven remarkably accurate in the short run (Berg, Forsythe, Nelson and Rietz, 2003) and

the long run (Berg, Nelson and Rietz, 2003).

A. Description of the Google IPO Markets

The IEM conducted two markets associated with the Google IPO. Both markets traded contracts

with liquidation values based on the total market capitalization implied by the closing price of Google

stock at the end of the first day of trading. Contracts were based on total market capitalization rather than

share price so that the markets could open before initial price ranges and share quantities were announced.

IPOs had fees of 4%. So, while fees for smaller IPOs typically average 7%, the fee here seems in line after considering IPO size. The auction may have allowed Google to more accurately assess demand and avoid the costs associated with over-allotment options. However, Google’s over-allotment option was exactly 15%, the “typical” amount in the U.S. according to Brealey and Myers (2003, p. 413).


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