Searching for Google's Value: Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering

Joyce E. Berg (), George R. Neumann () and Thomas A. Rietz ()
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Joyce E. Berg: Department of Accounting, Tippie College of Business, University of Iowa, Iowa City, Iowa 52242
George R. Neumann: Department of Economics, Tippie College of Business, University of Iowa, Iowa City, Iowa 52242
Thomas A. Rietz: Department of Finance, Tippie College of Business, University of Iowa, Iowa City, Iowa 52242

Management Science, 2009, vol. 55, issue 3, 348-361

Abstract: We conducted prediction markets designed to forecast post-initial public offering (IPO) valuations before a particularly unique IPO: Google. The prediction markets forecast Google's post-IPO market capitalization relatively accurately. While Google's auction-based IPO price was 15.3% below the first-day closing market capitalization, the final prediction market forecast was only 4.0% above it. The forecast also accorded with the level of over-subscription in the IPO auction. Evidence available to both outsiders (from the prediction market forecasts) and insiders (through the orders in Google's auction) predicted similar degrees of underpricing. We argue that, with repetition, such markets could provide useful information for understanding the IPO process.

Keywords: initial public offering; underpricing; asymmetric information; prediction markets (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (17)

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