Searching for Google's value: Using prediction markets to forecast market capitalization prior to an initial public offering

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 IPOprice 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 IPOauction. 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 IPOprocess.