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Searching for Google’s Value:

Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering

December 2005

Abstract

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

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