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market prices, they would raise substantially more money and/or incur substantially less dilution on

average. Given Google’s stated goals, their IPO provides a natural benchmark for the performance of our

prediction markets: we can compare the difference between Google’s IPO valuation and the post-IPO

market valuation to the difference between the prediction market forecast and the post-IPO market


Though Google’s auction process was used to gauge interest from potential shareholders and,

with sufficient confirmation, used to generate binding orders for shares, it was not, strictly speaking, a

direct auction of shares. For example, Google and its underwriters retained the right to reject bids they

found manipulative or disruptive at their sole discretion without notifying bidders who submitted these

bids. Moreover, the prospectus clearly states that the IPO price need not be the auction clearing price.

Page 38 of the amended S-1 filing on August 13, 2004 (the day the auction began) states (emphasis


The initial public offering price will be determined by us and our underwriters after the auction closes. We intend to use the auction clearing price to determine the initial public offering price and, therefore, to set an initial public offering price that is equal to the clearing price. However, we and our underwriters have discretion to set the initial public offering price below the auction clearing price.

As a result, the IPO price could fall below the actual auction market clearing price. This

possibility required a potential allocation mechanism in which bidders would not receive the full number

of shares for which they bid. Two allocation mechanisms were described in the prospectus, with the

decision about which would be used left to management discretion. Because the auction order book and

clearing prices have not been made public (in accordance with prospectus rules), we do not know

precisely how much “discretion” was exercised and how far the IPO price was set below the auction

market clearing price. Nor do we know exactly how close the auction market clearing price may have

been to eventual trading prices. 12 However, we can estimate Google’s demand curve using information


We note that another possible reason for using the auction mechanism is to decrease underwriting fees. According to Google’s final prospectus, underwriting discounts and commissions accounted for $2.3839 of the $85 offer price. Thus, fees were 2.8% of the offer price. Only one IPO in Chen and Ritter’s (2000) data set on fees in IPOs approaches Google’s size. The fees on this $1.3 billion IPO were 2.97%. The next two largest


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