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Given the apparent difficulty in forecasting eventual market capitalizations of IPOs, this is remarkably

accurate. It is consistent with mounting evidence that prediction markets forecast accurately (see Berg,

Forsythe, Nelson and Rietz, 2003; Berg, Nelson and Rietz, 2003; among others).

B. The Evolution of Uncertainty Surrounding the IPO

By documenting a forecast distribution through time, we can document the degree of uncertainty

and the reduction of uncertainty as the IPO unfolded. We view this direct evidence on the evolution of

uncertainty during an IPO process as a significant contribution. In Figure 4, we plot the estimated

(implied) volatility of the WTA market forecast (σˆt ). Implied volatility (i.e., uncertainty about the

market capitalization forecast) is high, but falls dramatically as the IPO date approaches. Volatility,

measured by the standard deviation of the logarithm of the forecasted market capitalization, declined by

about two thirds from a high point (the day after all contracts had traded in the market) to the day before

the SEC’s final approval.

As one would predict from an informationally efficient market, significant changes in uncertainty

follow events with significant informational content. Figure 4 shows that uncertainty peaked shortly after

all contracts had traded in the markets (on July 9th and 10th). The largest reductions in uncertainty appear

to occur when announcements and amendments resolved important issues.

Volatility fell on every

amendment filing date except one: Amendment 7, the amendment in which the potential fallout from

Playboy’s interview (Sheff, 2004) of Google’s founders was addressed. Every other amendment seems to

have reduced uncertainty, especially Amendment 4 (which outlined the initial price range and quantities

expected to be offered and resulted in the largest single daily reduction in uncertainty) and Amendment 3

(which resolved uncertainty about where Google would be listed and resulted in the third largest single

daily reduction in uncertainty). Also of note was the settlement of a potential Yahoo lawsuit, which was

reported in newspapers on August 10th and appeared in Amendment 6 on August 11th (resulting in the 4th

and 7th largest single daily reductions in uncertainty, respectively). Overall, the average change


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