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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