Here's two contrasting takes -- by James Surowiecki on Marginal Revolution and Holman Jenkins in today's WSJ.
These writers basically disagree about whether Google's Dutch auction really did maximize the company's take by changing the IPO rules -- that is, bypassing pricing by professionals and going directly to the market. The two writers agree, though, that Google's auction was an improvement on old ways to the extent that it made the allocation process fairer. (This assumes the allocation process was as advertised, which Jenkins wonders about.)
But Jenkins' article raises a more fundamental problem with the Google offering. The process and accompanying hype lured individual investors to gamble on a company with dubious prospects. As I've said, Google's value was only vaguely evident from the prospectus. As it happens, they may have gotten a good deal that suitably accounted for the high risk, but that was only an accident in this case.
I am not advocating more stringent regulation of IPO’s – only caution in celebrating any increased role of individual investors in those transactions, and adopting any regulation that might have the effect of encouraging this development. Now of course the SEC and the press love individual investors. Superficially there's something to be said for the liquidity they bring. But, as was pointed out long ago in Gilson and Kraakman's pathbreaking The Mechanisms of Market Efficiency, 70 Va L Rev 549, 567 (1984), outsider trading may not add that much to market efficiency. And as I've pointed out before, e.g., here and here, the SEC's policy of luring individual investors into the market is dubious policy.
We may see this more clearly when Google comes crashing down, just as we saw it when the market bubble burst. Then, no doubt, there will be calls for more regulation to build "investor confidence," thereby laying the groundwork for another debacle. It's time we recognized that the markets are dangerous places for unsophisticated investors taking a flier on individual stocks. The romance of the markets might be fine for journalists, securities regulators and brokers, but it's not so good for the rest of us.
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