Where Have All the Public Companies Gone?
The U.S. now has half as many publicly listed companies trading on its exchanges as it did at the peak in 1996. As the chart below shows, listed companies reached a high of 7,322. That number today is down almost by half to 3,700 and is more than 1,000 lower than in 1975.
Source: NBER, Political Calculations
Why the number of listings has fallen so precipitously is the focus of "The Listing Gap," a National Bureau of Economic Research report published last month. The authors, Craig Doidge of University of Toronto, G. Andrew Karolyi of Johnson Graduate School of Management at Cornell University, and René M. Stulz of Ohio State University, suggest a number of reasons for the decline. Much of the data and trend analysis they performed runs counter to commonly accepted Wall Street wisdom.
Why so few listings today? There are two forces at work: a high number of delistings, accounting for roughly 46 percent of the decline, and a relatively low number of new listings, accounting for 54 percent. The authors' explanations for these two forces may surprise you.
Let's begin with the plunge in new listings: "The number of U.S. listings fell from 8,025 in 1996 to 4,101 in 2012, whereas non-U.S. listings increased from 30,734 to 39,427." That's a stark contrast. In other words, while new listings rose 28 percent overseas, they fell 49 percent in the U.S.
The researchers eliminated a few possible explanations. A lack of new startups or company formation wasn't the issue: In the U.S., the total number of businesses remained little changed, and the number of startups actually increased. Nor was any one industry -- or a handful of them -- responsible for the decline; the authors noted that "listings decreased in all but one of the 49 industries after 1996."
The study also looked into the old argument that "regulatory and legal changes in the early 2000s, including Regulation Fair Disclosure ('Reg FD') and the Sarbanes-Oxley Act ('SOX'), made it more expensive" to list. These played little or no role because the decrease in new listings was "well on its way before these changes took place." At worst, the regulatory burden accounts for only a small portion of the decline.
Then there are the delistings,which were driven by three main forces: mergers and acquisitions, failure to meet exchange listing requirements, and going private.
The costs and complexity of being a public company are often blamed for the increase in delistings, but the data doesn't support that as a primary cause.
This was a common argument made after the adoption of the Sarbanes-Oxley Act in 2002. The general concern was the cost and complexity of compliance would lead more businesses -- especially smaller ones -- to go private. The data shows, however, that the "number of voluntary delists is far too small to explain the high number of delists."
In contrast, mergers and acquisitions were a much larger source of delistings. The U.S. experienced an unusually high number of merger-related delistings after 1996 compared with both the U.S. historically and other countries. "From 1997 to 2012, the U.S. had 8,327 delists, of which 4,957 were due to mergers," the researchers wrote. This accounts for almost 45 percent of the delistings after the 1996 peak.
There is more data in the report that leads to some interesting questions:
• The pools of venture capital and private equity are considerably larger today than they were in 1996. Does this account for today's tech bubble and prevalence of so-called unicorns, or startups with values of more than $1 billion?
• When companies such as Uber are well-funded through private offerings, they have little reason to go public. Is that a one-off or a broader trend?
• Are small closely held companies looking for an exit via acquisition or merger rather than an initial public offering?
• We have discussed the shortage of quality bonds; is there a similar shortage of equities?
• What does the low number of publicly traded companies mean for valuations? Does it in any way suggest that stocks are now valued higher than their long-term averages?
I can't give you conclusive answers to any of these questions, but they are worth delving into further.
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