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Summary of the Evidence on Theory

Some of the results above are driven only by the outcomes of the IEM prediction markets. In

particular, the fact that the prediction markets aggregated trader information, creating an accurate forecast

at little cost drives results 1 and 2 above. Evidence on the correlation of uncertainty and underpricing

(part of result 3 above) is also independent of the auction mechanism. Combined, this evidence leans

against IPO underpricing theories that rely on asymmetric information. Further, since the evidence is

independent of the unique features of Google’s IPO, we argue that these results should apply to IPO’s in

general. Some of the results shown above arise because of the Google auction mechanism, but shed light

on all IPO’s. The auction mechanism eliminates some factors that lead theorists to predict underpricing.

Specifically, the auction eliminates pre-commitment to prices or underpricing and discretionary

allocations of shares as sources of underpricing (result 4 above). Since underpricing still occurs, this casts

doubt on these as reasons for underpricing in general. Some results depend on the combination of the

prediction markets and the unique features of the Google IPO. In particular, the combination drives part

of the mixed evidence on winner’s curse models in result 3 above and the evidence for models of

underpricing in exchange for future benefits in result 5 above. This constellation of results highlight why

Google is a particularly informative case to study.

E. Practical Implications

Setting IPO prices according to predictions would have made a substantial difference in funds

raised. Table II shows the difference it might have made. Google actually set an IPO price of $85,

implying a market capitalization of $23.1 billion. The closing market price and market capitalization

were 18% above this after the first day of trading. According to the final prospectus, Google sold

14,142,135 shares and existing shareholders sold 5,462,917 shares for a total of 19,605,052 shares at a net

price of $82.6161. At the IPO price, Google raised $1,168.4 million for itself and selling shareholders

received $451.3 million (Table II, column 1). Had Google managed to set the price equal to the closing


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