13 May WERE INVESTORS, WHO PURCHASED GOOGLE SHARES AT $100 IRRATIONAL, IN THAT THEY COULD HAVE PAID$85 THE DAY BEFORE?
On August 19, 2004, the Internet search firm Google went public, at an offer price of $85 pershare. The IPO was unconventional in that Google used an auction to determine its offer priceand sell shares to investors. In this respect, underwriters did not allocate shares to clients.Instead investors registered to participate in the auction, and indicated the maximum price theywere willing to pay, along with the number of shares they wished to purchase. If a registeredinvestors maximum price was at least the offer price, the investor paid the offer price, not theirmaximum price. Google had established its initial file range for the offer price to be $108 to $135a share. However, based on the interest shown by investors in registering for the auction, thefirms executives reduced the range to between $85 and $95. On its first day, Google stockopened at $100 per share.A. Were investors, who purchased Google shares at $100 irrational, in that they could have paid$85 the day before? Or might there be some other explanation for the 17 percent jump in pricewhen the stock began to trade publicly? Discuss.B. Today, Google share price is considerably higher than even the most optimistic forecasters atthe time of the IPO. Are current investors being irrational?
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