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Where Have All the Public Companies Gone?

For reasons no one fully understands, fewer and fewer American companies are selling their stocks to the public, opting instead to rely on private banks and venture capital firms for financing. In the New York Times, Steven Davidoff Solomon highlights the scope of the decline and offers some possible reasons for it:

The confirmation hearing last week for Jay Clayton, who has been nominated to head the Securities and Exchange Commission, focused on the continued sluggishness of the market for initial public offerings. Senators pushed the nominee to do something, anything, to revive it. […]

The problems were recently documented in a research note by Credit Suisse titled “The Incredible Shrinking Universe of Stocks.” The bank documented that the total number of companies listed on the United States stock market plummeted by nearly half, to 3,671 last year from 7,322 in 1996.

Companies get bought or go out of business, but new companies are not replacing them. In 1996 there were 706 initial public offerings, but in 2016 there were only 105.

Solomon’s core argument is that the problem goes beyond regulation and disclosure requirements that might discourage IPOs, although this is the explanation favored by politicians.

One pattern contributing to this trend is the tendency of small companies to be acquired by big ones before they go public. Politicians and regulators concerned about the evaporation of public stock could take a number of approaches, including, according to Solomon, “allowing mutual funds more latitude to buy illiquid small investments.” Another possibility would be to experiment with anti-trust laws to try to slow the rate at which small companies are bought out in Silicon Valley, for example.

As Solomon says, however, this is a thorny and highly complex issue with no simple fixes. Read his whole piece to get a better sense of what is at stake and what, if anything, should be done about it.

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  • Unelected Leader

    It’s not that complicated. It’s the slow (almost non) recovery, the risks associated with IPOs, and a general lack of business spending for years.
    Look at the past three years alone, the economy has seen business’ capital investment expand only 2.75% a year. That pace might seem in line with overall growth, but it is disproportionately slow by the standards of past recoveries.

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  • Angel Martin

    I believe it is a lag effect from a multi year lull in new business startups following the 2008 crash.

    https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm

    Numbers have nearly recovered, and small business optimism has shot up with the election of Trump.

    My own view is that this recovery cycle is almost done. Other people may be optimistic but I am not.

  • Anthony

    Rather than where have all the public companies gone, another view or approach is why would companies want to go public. Importantly, a difference between today and the past is that entrepreneurs and investors don’t necessarily have to go public to get liquidity. An equally viable conversation may ask why would companies want to go public.

    • LarryD

      As a general rule, private or closely held companies, where the management and owners have a considerable overlap, are usually better run than public companies. When you have skin in the game, you think longer term. And aren’t interested in gutting the company.

      • Anthony

        That’s reasonable and quite probable as well as making commonsense. I’m sure those you generalize would agree (as a rule).

  • D4x

    What was the rate of new business formation since 2008? How many successful small to mid-size businesses believe they have stakeholders more important than shareholders? Add in the serious compliance costs to new regulations poured out of DC 2009-2016, plus zero interest rates available to private equity. Enough reasons to finally change Wall Street’s short-term paradigm where the next quarter profits are more important than longterm growth. Good recipe for also ignoring Wall Street’s quest for hefty fees on IPOs so they can later seek hefty fees for leveraged buyouts.

    • f1b0nacc1

      You have hit the nail on the head. The combination of ultra-low (zero in many, if not most cases) interest rates and the enormous extra regulatory costs have made public companies (especially small ones) very difficult to sustain. Idiocy like Sarbanes-Oxley impose gigantic additional costs upon public companies while providing not a single fraction of extra security for the general investor, though they do a wonderful job of enriching well-connected auditing firms who pushed for this in the first place, while zero interest rates give start-ups and small firms no real reason to endure those costs.

  • Fat_Man

    Oh my goodness, a leftist law prof from Berkley (there is a rarity) discovers that the leftist project of floging private economic activity to death has suceeded beyond the wildest dreams of of Karl Marx, and is trying to find a way to avoid the blame. Twaddle.

    The article does have some good news. The author says that it will be his last. Unfortunately, the republic’s law schools have hundreds of more leftist hacks to whom the NYTime’s shilling would be a most welcome.

    BTW, I have actually meet this particular leftist hack face to face, and attempted to engage him in reasoned conversation about his writing. He was a slimy little twit who squirmed away, most likely because he could not defend what he had written. Good riddance.

  • markterribile

    Might the more restricted treatment of stock options make it more profitable to sell the company early and get the money that way, rather than taking risk for reward largely confiscated by Big Brother Sam?

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