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

Author

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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)

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.

Suggested Citation

  • Joyce E. Berg & George R. Neumann & Thomas A. Rietz, 2009. "Searching for Google's Value: Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering," Management Science, INFORMS, vol. 55(3), pages 348-361, March.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:3:p:348-361
    DOI: 10.1287/mnsc.1080.0956
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    References listed on IDEAS

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    Cited by:

    1. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2013. "Prediction Markets for Economic Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 657-687, Elsevier.
    2. Boulu-Reshef, Béatrice & Comeig, Irene & Donze, Robert & Weiss, Gregory D., 2016. "Risk aversion in prediction markets: A framed-field experiment," Journal of Business Research, Elsevier, vol. 69(11), pages 5071-5075.
    3. Steininger, Dennis M. & Gatzemeier, Simon, 2019. "Digitally forecasting new music product success via active crowdsourcing," Technological Forecasting and Social Change, Elsevier, vol. 146(C), pages 167-180.
    4. Majid Karimi & Stanko Dimitrov, 2018. "On the Road to Making Science of “Art”: Risk Bias in Market Scoring Rules," Decision Analysis, INFORMS, vol. 15(2), pages 72-89, June.
    5. Bennouri, Moez & Gimpel, Henner & Robert, Jacques, 2011. "Measuring the impact of information aggregation mechanisms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 302-318, May.
    6. Goodell, John W. & McGroarty, Frank & Urquhart, Andrew, 2015. "Political uncertainty and the 2012 US presidential election: A cointegration study of prediction markets, polls and a stand-out expert," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 162-171.
    7. Joyce E. Berg & John Geweke & Thomas A. Rietz, 2010. "Memoirs of an indifferent trader: Estimating forecast distributions from prediction markets," Quantitative Economics, Econometric Society, vol. 1(1), pages 163-186, July.
    8. Simon Yu Kit Fung & Ferdinand A. Gul & Suresh Radhakrishnan, 2014. "Investment Banks' Entry into New IPO Markets and IPO Underpricing," Management Science, INFORMS, vol. 60(5), pages 1297-1316, May.
    9. Bourjade Sylvain, 2019. "Uniform Price Auctions with Asymmetric Bidders," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-14, January.
    10. Ho Cheung Brian Lee & Jan Stallaert & Ming Fan, 2020. "Anomalies in Probability Estimates for Event Forecasting on Prediction Markets," Production and Operations Management, Production and Operations Management Society, vol. 29(9), pages 2077-2095, September.
    11. Zhao, Yang & Yu, Min-Teh, 2020. "Predicting catastrophe risk: Evidence from catastrophe bond markets," Journal of Banking & Finance, Elsevier, vol. 121(C).

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