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

To inform theory and to investigate the practical application of prediction markets in a setting where the distribution of information across agents is critical, we conducted markets designed to forecast post-IPO valuations before a particularly unique IPO: Google. Because prediction markets allow us to infer the distribution of information before the IPO, the combination of results from our markets and the unique features of the IPO help us distinguish between underpricing theories. The evidence leans against theories which require large payments to buyers to overcome problems of asymmetric information between issuers and buyers. It is most consistent with theories where underpricing is in exchange for future benefits. This is but one of many potential applications for prediction markets in testing information-based theories. JEL Classification Codes: C53, C93, G10, G14, G24, G32