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uncertainty (change in σˆt ) on days of amendment filings was -0.066. The change on other days averaged

less than 0.001. According to a Mann-Whitney two-sample rank sum statistic, this difference is

significant (z=2.717, p-value=0.0066). This correspondence between the reductions in uncertainty

implied by prices and what one would expect from significant information releases leads further credence

to IEM prices as efficient forecasts.

C. Estimating the Demand Curve for the Google IPO

If we knew the demand curve for Google stock, we could determine whether the IEM predicted

post-IPO market price could have been a feasible market clearing price for the IPO. While Google has

not released information about the bids in its auction, publicly available information combined with

Google’s allocation mechanism, allows us to estimate the demand curve.

It seems likely that the IPO price was set below the market clearing price. Page 40 of the

amended S-1 filing on August 13, 2004 (the day the auction began) states, “If the initial public offering

price is equal to the auction clearing price, all successful bidders will be offered share allocations that are

equal or nearly equal to the number of shares represented by their successful bids” (italics added). If

Google set the price lower than the auction market clearing price, it stated that it would ration shares

using one of two mechanisms (pro rata or maximum share allocation) with a goal of allocating to

successful bidders at least 80% of their quantities bid. While it is possible that there was a highly elastic

demand at or very near the market clearing price that necessitated rationing, it is clear that Google

expected little rationing at the market clearing price and that significant rationing would indicate pricing

below the auction market clearing price.26


One might also argue that the $85 price resulted from tacit or explicit collusion among large investors to lower the price below true value in a Wilson (1979) style share auction equilibrium. However, free entry breaks this equilibrium. Further, supposing it did occur, this outcome would not change the implications for theory developed here because it would not change the evidence on the distribution of information, the lack of discretionary allocations of shares and the inability to pre-commit to underpricing. However, it would mean that underpricing was unavoidable given Google’s auction mechanism.


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