I would argue that the drop isn't from the market acting rationally at all, but in response to yet more hype supplied by the press, specifically the "how low will it go?" narrative you mention.
I disagree. While the market hasn't been acting too rationally in general over the last few years, FB dropping like a rock is actually a fairly rational response to their circumstances.
FB made less money in Q1 2012 than in Q1 2011. That was reported by them before the IPO. FB blamed it on the fact that more users are accessing Facebook through their mobile clients, which don't get them as much advertising money. Normal response to these kinds of reports is for the stock price to drop.
There's also the fact that they were horrendously overvalued in the first place. Facebook is quite possibly the most mature tech company to ever IPO. They already have their sources of income. They have arguably saturated their target market(1/6th of the human race has created accounts), and really don't have that much farther to grow, without seriously monetizing their current users. Unfortunately, as FB and all the other social network companies have found out, it's difficult to get more money out of your users without growing the user pool. Facebook can't grow their userbase exponentially, which really puts a lot of doubt on their future growth potential.
My gut feeling is that the IPO was not driven by Facebook needing the money(which would be normal), but that all the private investors and VC funds wanted to get out. They wanted as much money as possible, which would explain the high valuation.
Normally a private company cannot have most than 500 stockholders. Facebook obviously has more than that number of employees. They previously applied for and got an exemption from the SEC on the basis that most stockholders were employees.
That all changed early last year with Goldman Sachs' "investment vehicle" of holding stock on behalf of clients (a move the SEC will see through). That was deliberately done in January as it put a clock on filing for IPO by April this year, which is what happened.
Now they may have wanted to go public anyway. Whether or not they wanted to they signaled this event over a year ago.
>Normally a private company cannot have more than 500 stockholders.
I'm sure that you probably know this but just to be clear, the 500 shareholder limit is about whether or not a company has to report certain financial data to the SEC, not whether or not they must be publically traded.
If the market would have acted rationally, FB would never have IPO'd at 38 per share given their profits. Being valued at 105 billion dollar when your profit is only around 1 billion a year is insane, especially when you also account for the highly volatile nature of social networking (FB might be replaced by something we've never heard about in a couple of years)
