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Corporate Finance: A discussion on Google's IPO - Essay Example

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Corporate Finance: A discussion on Google's IPO

Dess (2012) identifies four financial theories that scholars can use to explain the prices of the shares by Google during their IPO. These theories are the market timing theory, the efficient market hypothesis theory, the prospects theory, and the game theory. Dess (2012) denotes the prospectus theory explains the behavior of the people in relation to the gains they are going to make. This theory denotes that individuals will always make decisions through a perception of the gains they expect to make. Bradley and Bradley (2012) observe that in a stock, a trader can either gain or loss. This is dependent on the changes of the stock prices under consideration. Hattersley (2012) denotes that investors quoted low prices for Google because of the profits they wanted to make. They knew that Google is a very profitable company, and in the long run, the prices of the shares of the company will increase. They will in turn make profits. Bradley and Bradley (2012) observe that investors were right in their prediction since the prices of the company sold at 106 dollars per share at the end of the trading. Dess (2012) supports this fact with another financial theory referred to as efficient market hypothesis theory. According to this theory, it is practically impossible to a company to under price, or over price its shares at the stock market. Zattoni (2012) observes that since the IPO took the form of a public auction, investors knew that by quoting low prices, they stood to gain a lot from the shares of Google. This is because the stock market will most definitely correct the share prices of Google. Zattoni (2012) and Dess (2012) believe that the factors of demand and supply always affect the shares of a company. On this basis, share prices are always guided by the laws of demand and supply. By quoting low prices during the public auction, investors knew that they will make a gain once the market rectifies the actual price of Google. Zimmerman and Ng (2012) denote that investors knew of an imminent increase of the company’s shares. This is because the demand of the shares will increase, leading to a limited supply hence an increase to their prices. On this basis, Zimmerman and Ng (2012) observe that investors will stand to gain. Dess (2012) and Zattoni (2012) observe that investors did not take long to benefit from the low prices of Google at its IPO. This is because at the end of trading, the shares of the company were sold at 106 dollars per share. In explaining the low share prices of Google at its IPO, Morgan (2012) indirectly relates the efficient market hypothesis theory, with the game theory. The game theory involves the determination of an individual’s action, based on the action of others. This is for purposes of gaining from the inefficiencies of others. The IPO of the company was through a public auction. Arthur (2012) in supporting this theory in its explanation of Google’s prices at the IPO denotes investors were very reluctant to pay high prices for the shares. This is because they wanted to capitalize on the limited knowledge of other investors in regard to the quality of the shares belonging to Google. Zimmerman and Ng (2012) observe that access to information is what guides the behavior of investors under the game theory. Investors, who are always acting on limited information, will always stand to lose. On this basis, investors hoped that other investors ...Show more

Summary

In 2004, Google Incl rolled out its shares to the stock exchange through a public auction. At the opening of the market, the shares of the company traded at 85 dollars per share. Arthur (2012) observes that this price was very low…
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Corporate Finance: A discussion on Googles IPO essay example
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