As “John Quiggin”:https://www.crookedtimber.org/archives/001786.html has already said, the expected market valuation of the Google IPO seems to reflect fundamental irrationality among its investors. At first glance, Google’s “IPO statement”:http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm#toc16167_1 is even crazier – it seems to poke a finger in the eye of Wall Street. Larry Page’s covering letter tells potential investors that Google will continue to reserve the right to make extremely risky investments, to coddle its employees, and to refuse to release traditional earning guidances.
bq. Although we may discuss long term trends in our business, we do not plan to give earnings guidance in the traditional sense. We are not able to predict our business within a narrow range for each quarter. We recognize that our duty is to advance our shareholders’ interests, and we believe that artificially creating short term target numbers serves our shareholders poorly. We would prefer not to be asked to make such predictions, and if asked we will respectfully decline. A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour.
In fact, there’s a very strong argument to be made that Google’s behavior is entirely rational, and furthermore is exactly the right thing to do if it wants to maximize its long term profits. As Gary Miller has argued in a series of publications, shareholder capitalism in the strong sense of the word is plagued by fundamental inefficiencies – shareholders cannot be trusted to maximize long term value because of fundamental dilemmas of social choice.