The Number of Publicy Traded Firms Has Halved

by on April 19, 2016 at 7:26 am in Economics | Permalink

In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT]. This decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today. This phenomenon has been a general pattern that has affected over 90% of U.S. industries.

A rather stunning finding from Grullon, Larkin and Michaely.

The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a small drop in the total number of firms (depending on year measured) and concentration ratios have increased which suggests that competition might have fallen. (I wish the authors had looked more closely at the entire size distribution). Have international firms risen to offset the decline of publicly-trade firms? The authors discuss but discount the role of globalization. I don’t see, however, how their findings of small effects on output competition are consistent with big labor market effects. Nevertheless the bottom line is that as concentration rates have increased so have profits, as a recent CEA report also argues.

Is this all the after-effects of the Great Recession? I hope so but the decline in the number of publicly traded firms is also consistent with the research on long-run declining dynamism (including my own research on regulation and dynamism) which shows that startup and reallocation rates have been trending down for thirty years.

Guy Rolnick at Pro-Market also discusses these trends and adds another thought to keep you up at night:

…One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on a growing share of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers?

1 Heorogar April 19, 2016 at 7:39 am

There has been a similar-magnitude decline in the number of FDIC-insured banks from mergers and acquisitions and, approximately, 400 receiverships in the recent financial crisis. The community bank is an endangered species. .

2 Curious April 19, 2016 at 12:35 pm

Consolidation of banking and health care industries should scare the piss out of us all.

3 Jay April 19, 2016 at 12:41 pm

Yup. Corporations (like manufacturers and retailers) that operate in all 50 states should have to do business with (at a minimum) 50 different banks. Go back to the days when bank operations didn’t cross state lines!

4 Curious April 19, 2016 at 1:08 pm

eh – more like quit regulating local banks the same way we regulate massive banks. Local banks can’t offset the cost, big ones gobble them up, everyone worse off.

5 carlolspln April 19, 2016 at 4:57 pm

You missed the punch line: this was the whole purpose of Frank ‘N Dodd.

The bill was written by the lobbyists & lawyers of the v largest banks: ‘The Usual Suspects’.

6 Stock Analyst April 19, 2016 at 8:51 pm

There are over 6,000 banks in the US today, while Canada has about 30 (6 of which make up 90% of the market). This is an artifact of US laws against branch banking and interstate banking, some of which were not repealed until fairly recently. In the 1980s, there were over 18,000 banks in the US, so we’ve already seen quite a bit of consolidation. Most countries having banking industries that look like Canada’s, not the US.

It’s not clear that the banking industry would be much less competitive if there were 60 banks instead of 6,000. As it is, most small banks are very local, and thus they don’t compete with each other. Scale matters. It’s a commodity product. Also, banks are continually losing share to non-banks in the broader financing market – wasn’t there a Gorton paper stating that banks only have 20% of that market? These days, big companies rely mostly on bonds, we have commercial and residential mortgage securitization, we have credit cards and so on.

The shrinking number of public companies is almost certainly the function of the VC and PE crowding out the bottom end of the market. The public markets are very top heavy – the S&P 500 is something like 75% of the market value of all public companies, even if it only accounts for 15% of all public companies by number. The median public company is truly very tiny – the numbers aren’t in the paper but based on the sales numbers given, you’re probably looking at a $100mm – $200mm market cap. Back in the day, it made sense for tiny companies to go public because that was often the cheapest source of capital. Today, you’ll get a much better deal from VC or PE. There may be less than 4,000 public companies, but there were 1,000 VC financings in the last quarter of 2015 alone!

7 TheAj April 20, 2016 at 3:07 am

Stock Analyst – you are way too rational and informed to participate here.

8 Brian Donohue April 20, 2016 at 10:31 am

@Stock Analyst,

Thread winner!

9 Agra Brum April 20, 2016 at 11:45 pm

We can have a relaxed regulatory group of community banks. They can just do things like savings. Maybe small loans.
We’ll call them the Savings and Loan group. Loosen the regulations. I’m sure it will work out well.

10 anon April 19, 2016 at 7:43 am

In 1970 we had a lot of regional variation, and regional firms. Today we have a fractal pattern of national firms. I know in retail the same chains dominate. A cross-country drive is disorienting because you keep passing the same shopping center with the same stores every 40 miles.

This might tie in with what Larry Summers and others observe:

“Third, it could be that higher profits do not reflect increased productivity of capital but instead reflect an increase in monopoly power. If monopoly power increased, one would expect to see higher profits, lower investment as firms restricted output, and lower interest rates as the demand for capital was reduced. This is exactly what we have seen in recent years!”

Would you try to go public with a regional sporting goods store? Incorporate for US made tennis rackets?

11 A Definite Beta Guy April 20, 2016 at 9:49 am

No, because I couldn’t complete with REI, or Dick’s. They have better logistics.

12 Agra Brum April 20, 2016 at 11:47 pm

Yes, there is a failure to acknowledge the lack of anti-trust enforcement leading to consolidation. The ‘mid-majors’ would be publicly traded corporations. Except now they are mostly subsidiaries of the much larger parent corp.

13 derek April 19, 2016 at 7:44 am

Almost every company I deal with are not publicly traded.

It isn’t complicated. Having Wall Street even distantly involved in the operation of your company is like putting your crazy uncle who falls for every cockamamie scheme on your board of directors.

Financial centers don’t collapse, they become irrelevant. Vancouver Stock Exchange anyone? The Fed and Treasury are doing the ultimate lipstick on a pig routine.

I think I predicted this here.

14 derek April 19, 2016 at 8:04 am

The companies who are publicly traded are almost impossible to deal with. Zero interest rates mean that nothing really matters. It is far easier to get a bunch of free money or buy a politician or two with that money than to develop and service a market. Just get the EPA to write a regulation that removes commodity priced products from the market.

By the way, the Asian manufacturers are doing to the US manufacturers what the Asian car manufacturers did in the 70 and 80’s. Cheap capital is buying up smaller manufacturers, small being relative here, first thing they do is get rid of anyone who actually knows the market they serve. They move production somewhere cheaper, the stuff is unusable no matter the price. The Germans or Japanese come in with products that are more expensive but less costly because they actually work. The Wall Street wizards play some games to inflate numbers to keep the institutional investors happy, and use up and assets until they are gone.

2008 was about ostensibly smart people utterly failing at the basic function they were paid to do. The smart money became the stupid money. In any rational market these people would be learning the basic functions of a market by selling apples on the street corner. But no, we can’t have that. The next rational thing to do is to isolate yourself as much as possible from their stupidity.

15 Hazel Meade April 19, 2016 at 10:58 am

Having Wall Street even distantly involved in the operation of your company is like putting your crazy uncle who falls for every cockamamie scheme on your board of directors.

I’m stealing this line.

16 Doug April 19, 2016 at 12:08 pm

Except your claims don’t hold up to evidence. The research indicates that the more active outside Wall Street investors are the better run companies tend to be. Once you back out private-equity and venture capital (which is very definitely Wall Street involved), private companies have an abysmal level of economic productivity compared to publicly traded multinationals.

Wall street investors are very good at setting objective targets and holding management’s feet to the fire. Management, particularly founders or founders’ family, tends to bitch and moan about this, because it’s uncomfortable, and high-pressure. Left to their own devices management tends to focus on non-productive empire building. You’ll often here complaints about ignoring the long-term to hit short-term numbers. But there’s no evidence that giving CEOs more leeway actually does anything but let them run the company with more slack and less focus.

An analogy is that Wall Street is like having a personal trainer at the gym. Working out by yourself and setting your own pace is definitely more enjoyable. A very small minority may indeed already have high focus, and just be very tuned into their body. They don’t need the external trainer telling them what to do. But the vast majority, without external discipline, would just use it as an excuse to be lazy and slow.

https://www.researchgate.net/profile/Diane_Del_Guercio/publication/4978428_The_motivation_and_impact_of_pension_fund_activism/links/02e7e532087c08ef08000000.pdf

17 derek April 19, 2016 at 12:23 pm

I’ll believe the market, not some study.

Monopoly rents are not from productivity.

18 carlolspln April 19, 2016 at 5:31 pm

“Wall street investors are very good at setting objective targets and holding management’s feet to the fire. Management, particularly founders or founders’ family, tends to bitch and moan about this, because it’s uncomfortable, and high-pressure. Left to their own devices management tends to focus on non-productive empire building. You’ll often here complaints about ignoring the long-term to hit short-term numbers. But there’s no evidence that giving CEOs more leeway actually does anything but let them run the company with more slack and less focus” [snip]

Here’s the big picture Doug: developed economies grow @ [when we’re lucky] 3-4% pa. Yet Wall St. requires all companies to grow @ 15% CAGR.

UPSHOT: not every company can be a ‘Special Snowflake’ ™

19 Doug April 20, 2016 at 1:09 am

Ok, fine. But if a mature company doesn’t have room for growth, start returning cash to shareholders. A well run mature company can generate 10% ROI. 3% growth and 7% dividend yield/buybacks. Since mature income stocks have low beta and volatility, they have lower cost of equity capital. Wall Street would be more than happy with 10% CAGR portfolio growth on this type of stock.

The problem is that management wants to have it both ways. They kick and scream before returning money to shareholders. They want to hoard earnings and use it for adventurism in empire building. But when they retain earnings, they complain that analysts demand unrealistic growth trajectories. The ultimate job for a CEO is running a blue chip behemoth, which is a safe established giant that isn’t going anywhere. But at the same time using all those mountains of cash flow to just screw around with. If it wasn’t for Wall Street, this is how nearly every Fortune 500 CEO would squander the majority of the economy’s valuable capital.

20 Eric April 19, 2016 at 7:44 am

It would be nice if someone could tease out the effects of locality in competition; eg if there were two banks in every state earlier, and 10 banks serving the US now, then in any given location competition would have increased, though the number of firms would have decreased. (This doesn’t hold if the competition isn’t local, eg defense contractors.)

I don’t think this is a huge effect but I don’t see it mentioned much.

21 Eric April 19, 2016 at 7:45 am

[this is really the same comment as ‘anon’]

22 Ray Lopez April 19, 2016 at 7:56 am

Or, an alternative reading is that from an evolutionary point of view, bigger is better (think dinosaurs) and the concentration in firms actually reflects, like in the Gilded Age, evidence that average is over and there are returns to scale that will yield not only a producer surplus, but a consumer surplus that everybody except Ida Tarbell should recognize.

23 anon April 19, 2016 at 8:00 am

Cheap computing probably makes a difference.

24 Ray Lopez April 19, 2016 at 8:07 am

@anon- yes it does. So you agree: Moore’s Law yields a Natural Monopoly? Just compare the asymptotic graphs, they are both the same.

25 Ray Lopez April 19, 2016 at 8:09 am

AKA just Google on Bing.com “The Tyranny of Silicon”. The big boys win the whole prize, due to the corollary of Moore’s Law, Rock’s Law.

N.B. – quality of comments has gone down dramatically since I took a break from here…sad.

26 anon April 19, 2016 at 8:10 am

I don’t follow that. The previous revolutions, agriculture and manufacturing, were about practices that could be widely replicated. With perpetual IP we’d all be paying Persians for every crop?

27 Ray Lopez April 19, 2016 at 2:38 pm

Yes, but look at the bright side: with strong IP, you’d be giving incentive to inventors who would otherwise not invent to come up with stuff several hundred generations (or years) before they ordinarily would with the present system. Thus, if we had strong IP in place back in the days of the ancient Persians (who btw according to one speculative source invented electroplating, but it was trade secret and it was subsequently lost) then today we’d be eating plates of of GMO delicious superfood that would allow us to never get fat and live forever.

Is that scenario worth a few pennies a year paid to the country of Iran? Methinks so. Trouble is, the above is –like Scott Sumner’s version of monetarism–very difficult to prove. By contrast, today’s system of basically relying on Good Samaritans to invent for free (i.e., innovation does not really pay the original inventor, it’s a non-linear relationship at best) is ‘proven’ in that history shows it does produce some innovation, albeit at a retarded pace.

28 derek April 19, 2016 at 8:16 am

The gilded age was about great projects to develop an economy. The guy who figures out how to get central heating to everyone in China will become unimaginably wealthy.

The big now is free money. Buy up competitors to grow market share and actually shrink the market and destroy value.

What characterized the dinosaur age was the development of smaller and more nimble critters who initially thrived on the niches the dinosaurs ignored, and eventually prevailed as they could adapt to changes. These big behemoths only thrive when they through size define the markets. Their systems work really well at imposing a way of doing things, where the flaws of the system become market characteristics. They need cheap money because they destroy value. What is going to challenge them is the instability from political change. A slight perturbation means the supply chain stops working and they have neither the people nor the knowledge to deal with the situation.

29 Brian Donohue April 19, 2016 at 11:09 am

I think ‘cheap money’ is largely a function of supply and demand, not government policy.

30 dbp April 19, 2016 at 8:06 am

Sarbanes-Oxley was supposedly an investor protection law. What it appears to have protected us against is having anyplace to invest.

31 Ricardo April 20, 2016 at 6:28 am

That’s some hyperbole. There are over 3,000 U.S. incorporated companies traded on major exchanges one can invest one’s money in. If that isn’t enough, there are many more options in pink sheets or over the counter, foreign companies that list in the U.S., corporate bonds, mutual funds or ETFs that cover non-U.S. stocks, etc.

32 rayward April 19, 2016 at 8:09 am

With a global savings glut, what’s the point in going public to raise capital when cheap credit is available and private equity is chasing the latest big thing. Besides, it isn’t as though firms in the U.S. are investing heavily in productive capital. Indeed, the traditional model of the firm has become passe, “profits” as antiquated as our transportation network. As for Tabarrok’s point about investing in stocks, it’s not as though sophisticated investors (i.e., those with deep pockets) didn’t leave the building long ago, preferring “alternative investments” with much higher (potential) rates of return (derived mostly from capital gains). During the latest housing bubble Americans prospered by selling houses to each other. How is that different from sophisticated investors selling companies to each other.

33 yo April 19, 2016 at 8:12 am

Isn’t the former rationale for going public the fact that it’s a source of cash, for expansion or payout? Nowadays the world is flush with cash, hardly any large firm seems to be cash constrained at all. Who is willing to give up control in exchange for cash? As an investor, paying off your shareholders and going private instead seems more fun.

34 Steve Sailer April 19, 2016 at 8:21 am

The Mexican economy is badly hamstrung by monopolists gouging the public. The New York Times had a good article back in 2006 about how monopolists cost the Mexican economy one percentage point in growth each year. But here in America we haven’t heard much about that since Carlos Slim bailed out the New York Times in 2009.

http://takimag.com/article/better_a_crook_than_a_wasp_the_left_ditches_progressivism_steve_sailer/print#axzz468W9ahsw

Instead we hear in the NYT about how evil are Americans who think that maybe Mexicans should stay home and fix their own problems.

Funny how that works …

35 Smotherington April 19, 2016 at 2:15 pm

Except there was an article about this in the NY Times, literally yesterday: http://www.nytimes.com/2016/04/18/opinion/robber-baron-recessions.html

Funny how that works…

36 Steve Sailer April 19, 2016 at 8:09 pm

Paul Krugman courageously used his platform in the New York Times to denounce the world’s most flagrant monopolist, Carlos Slim!

Except … that didn’t happen.

In fact, from Google I can’t find much evidence that Krugman has ever mentioned the name of the intermittent Richest Man in the World, who just happened to financially bail out the New York Times in 2009.

In contrast, Thomas Piketty did mention Slim’s name in “Capital in the 21st Century,” but only to imply that criticism of Slim was motivated by ethnic bigotry.

37 Ben April 19, 2016 at 8:33 am

I think the answer is partly explained by: 1) private equity serving as a shadow public market where some companies are taken private and some companies remain private for much longer instead of going public; and 2) venture capital keeping companies private for longer than what was done previously.

Private markets are the new public markets.

38 Curious April 19, 2016 at 3:50 pm

Not really sure I follow. Companies are “taken” private and/or remain private precisely b/c they found other sources of capital that don’t force them to be subject to the cost and scrutiny that public companies are subjected to. They are “taken” private and remain private precisely because they don’t want to, nor do they need to, be public. So how are they the new public? More like, being public sucks, stay private.

39 Ben April 20, 2016 at 1:28 pm

You used to *want* to take your company public – a public company was a sign of success, of stability. It’s almost like being private is the sign of success nowadays. Thus, being private is the new public.

40 wiki April 19, 2016 at 8:52 am

Sounds like we’re becoming Europe. Which is what some people have always wanted.

41 Bill April 19, 2016 at 9:08 am

For the market they use to measure concentration, they use simple census data by SIC…which doesn’t account for imports, uses industry definition by the way products are made (sugar made from sugar cane is in a different SIC than sugar made from sugar beets), etc., and doesn’t consider geographic markets as relevant markets. So, conclusions drawn from the data–hold your breath–are random events.

Second, re declining number of publicly traded company numbers, that may be true…telling you many things, including an active market for acquiring small firms, changing managerial economies of scale, foreign firms acquiring US corporate entities, greater reliance on other types of financing, increase in wealthy people who do not need to finance by taking their company public etc.

42 Steve Sailer April 19, 2016 at 9:11 am

These days, 1911-style Trust Busting sounds kind of racist. At best, it’s a distraction from the really important issues, like transgender bathroom rights. From the New York Times on 2/13/16:

““If we broke up the big banks tomorrow,” Mrs. Clinton asked the audience of black, white and Hispanic union members, “would that end racism? Would that end sexism? Would that end discrimination against the L.G.B.T. community?,” she said, using an abbreviation for lesbian, gay, bisexual and transgender. “Would that make people feel more welcoming to immigrants overnight?” At each question, the crowd called back with a resounding no.”

43 The Original D April 19, 2016 at 8:23 pm

If governors in the south want to pick a fight, they shouldn’t be surprised when opponents show up.

44 A Black Man April 20, 2016 at 9:24 am

Cause we all know that the norm for the whole of human civilization has been to allow men in sun dresses to stalk girls in public restrooms. My goodness. What were those hayseeds down there thinking?

45 A Definite Beta Guy April 20, 2016 at 10:05 am

Lol, glad to know we have our priorities in order. Who the hell cares about the state of capital markets?! Someone said something mean about a minority!

46 LR April 19, 2016 at 9:28 am

IT. Plain and simple.

47 jb April 19, 2016 at 10:30 am

I work at a company that is considering whether to go public. We are profitable enough to be an attractive investment target, but the costs involved in doing so (increased external financial audit procedures, need to hire more people to avoid findings from said procedures, the same on the regulatory compliance side) would reduce if not wipe out said profits. Not that I mind, since some of those costs would be a higher salary and more subordinates for me, but still.

We used to be public but were bought out by a private equity firm some years ago due to running into financial issues, and it’s been a struggle to maintain the institutional knowledge to even think about trying to prepare for the compliance requirements. If we don’t go public within a few years, the wrong people will start retiring and we’ll have no idea even what we’d need to scale up to do, which would raise the costs of going public to prohibitive levels.

That is, unless the economy rebounds and we have a few years of unsustainable profitability. Then we will be able to justify hiring enough people to get over the hump, but the buyers of our stock will be sorely disappointed when the boom ends.

I doubt this story is rare among large privately-held companies.

48 A Definite Beta Guy April 20, 2016 at 10:07 am

Can you explain why it’s been a struggle to maintain institutional knowledge? Are people simply leaving to get higher salaries at public firms?

49 Brian April 19, 2016 at 10:43 am
50 rossle April 19, 2016 at 10:47 am

My first thoughts (beyond SarBox) were deep:

1) dematerialization/abstraction scales – so as software, finance, and media grow the economy gets more monopolistic
2) changes in anti-trust doctrine with a shift away from maintaining competition and toward consumer prices.
3) improved logistics and bureaucratic systems (e.g. CRM and ERP . . . or merely email and spreadsheets) which help knit together national and multinational companies which previously might have been optimal at regional scale.
4) a more globalized market in which the relevant numerator is global larger firms and in which the denominator by which the number of firms may be contextualized is not population of GDP but the number of economic niches in a global market (which is larger than in any national market, but smaller than the sum of national niches in a less globalized market).

But then I realized the answer was likely much simpler:

Private equity ate half the public market. From the late 90s to 2014 the number of US private-equity owned business went from <2000 to ~7500. Many of these deals were "middle-market" companies too small for the public markets, but over a quarter were formerly public companies bought directly from the public market and many more were companies which never went public due to the availability of private-equity buyers.
Source: http://pitchbook.com/

51 Bob April 19, 2016 at 10:50 am

Nowadays you can get hundreds of millions in private capital, with billion dollar valuations, without ever sniffing the stock market. In the past, raising that kind of money was reserved to public companies.

As an added feature, those companies pay people with stock options, and the longer they stay private, the less likely people are going to leave, because employees can’t even afford to pay the taxes for exercising the options, leading to the return of the 5, 10 year tenures in software.

If our biggest new industry barely produces publicly traded companies, it’s no surprise that the total number is shrinking.

52 JWatts April 19, 2016 at 12:06 pm

“…because employees can’t even afford to pay the taxes for exercising the options …”

Why wouldn’t they just sale whatever fraction of the stock necessary to cover their marginal tax rate?

53 Doug April 19, 2016 at 12:14 pm

I’ll add another advantage of being private equity funded: management can much more tightly control the firm’s valuation. Or at least the perception thereof. As a publicly traded company mullti-billion dollar company your firm’s “official value” literally fluctuates up and down by tens of millions every-day. A private firm’s valuation doesn’t “officially” reset until they raise a new round of funding. That allows management to time fund-raising, wait-out down-cycles, and produce an uninterrupted graph of increasing share price. That kind of window-dressing is invaluable. Most importantly it helps convince your financially naive employees to accept stock in lieu of cash. Often at an inflated top-ticked valuation.

54 Hazel Meade April 19, 2016 at 10:55 am

Pension plans are invested in mutual funds whose content changes, so I would imagine that’s some protection against the funds being dependent on rent-seeking. A less heavily regulated economy would be overall more dynamic and prosperous, so if some rent-seeking companies went under it wouldn’t necessarily hurt those funds, as long as the funds sold their stock before they went under. And the money would then be invested in other, presumably more profitable alternatives.
I can’t say that if the trends continued and a lopsided sector of the economy was based on rent-seeking this wouldn’t become a bigger problem, but we’re not China yet.

55 magilson April 19, 2016 at 3:05 pm

Consider that rent-seeking behavior and firms more co-dependent on it are proportional to the regulatory burden itself. Then consider that the regulation is, in and of itself, a goal as opposed to a reaction to a market condition. If rent-seeking companies did go under you would see a shift in the attention of the regulation and therefore rent-seeking. As rent-seeking firms fail we simply substitute other firms and other economic sectors for that that might have been lost. Once you go down the road of corporatism/crony capitalism and begin to develop that economic sector as a free standing entity it’s just not going to go away on it’s own. We’re not China but maybe we’re worse. “We” don’t even know that we’re trying to do what they do on purpose. And I’d argue that’s even worse. A planned economy may have some slim chance of success. Telling ourselves we have an unplanned economy while we’re doing all these planned economy things strikes me as a much more dangerous situation.

56 Tom Warner April 19, 2016 at 10:57 am

I think there are different stories in different sectors. Surely there’s classic rent-seeking in the cable or rail businesses, for example. But the concentration of big brands in consumer goods seems hard to explain that way. I find it’s not difficult at all avoiding them. It seems they earn a premium relative to their quality thanks to the inertia of advertising, and the investment case for going up against them is weak for reasons unrelated to regulation. Softening regulation would create more competition among the small to mid-size consumer businesses, at the cost of more dodgy producers. But I doubt it would reduce the concentration of the big brands.

57 Steve Sailer April 19, 2016 at 11:13 am

You can now get away with mergers that would have been unthinkable in the 1970s or even 1980s, such as ExxonMobil.

58 carlolspln April 19, 2016 at 5:40 pm

Anti Trust regulation in the USA has been obliterated:

https://en.wikipedia.org/wiki/List_of_largest_mergers_and_acquisitions

59 Hazel Meade April 19, 2016 at 11:01 am

Speculatively, I also wonder to what extent these numbers are accurate. What with the gig economy and all, it seems like many of my friends are running personal side businesses, and none of those businesses presumably count in those numbers (not being publicly traded). To me it seems like there is no loss of dynamism at the lowest level of the economy – quite the opposite. Maybe it’s just part of some larger economic transition associated with the technology revolution.

60 Chip April 19, 2016 at 8:28 pm

“You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.”

“Forty-five percent of young people say they would vote for Sanders if the election were held today.”

I get a kick out of Kickstarter campaigns for Bernie Sanders stuff, because nothing says socialism rocks like a free-wheeling market of voluntary exchange.

We might be screwed.

61 Mike April 19, 2016 at 11:26 am

I am the CFO of a small company that went private on the eve of Sarbanes-Oxley. In our case, we probably shouldn’t have been public in the first place, we didn’t need new capital, and the stock was thinly traded. The costs of implementing SarBox would have been 15% of EBITDA. Not a tough call.

The thing I remember about being public, is that our public disclosures while correct and accurate, held very little useful information for investors. Any time I was tempted to include something of interest in the 10-Q or 10-K it was scrubbed out by counsel.

Now that we are private I can have much more substantive conversations with our investors. This has led to better decisions and better returns. At our scale ~ $50MM I can’t imaging what would make me want to go back.

62 Doug April 19, 2016 at 12:15 pm

Interesting! Any examples you could share?

63 yZrs April 19, 2016 at 12:35 pm

From my own experience in energy trading I know that reported GAAP results for anything related to that industry have no bearing on economic value or the true health of that business (because of stupid rules around how assets and hedges must be reported).

From speaking to others with significant commercial/finance experience in other industries, the same usually holds true for their area of expertise.

Therefore I assume that for pretty much any company in any industry GAAP results are just a rolled-up collection of meaningless numbers.

64 Dan D April 19, 2016 at 12:40 pm

Exactly, the regulatory requirements of publicly traded have become exponentially greater over the past twenty years, and the environment encourages risk aversion. Lots and lots of pointless boilerplate and fudging, little analytical clarity, lawyers have the final say, and the requirements add a LOT of cost, visible and hidden, while adding little marginal value to investors.

Privately held companies have many more options as well in structure, usually as pass-through entities, so the double taxation that C-corporations are faced with can be avoided or at least mitigated with the correct structure.

I have many specific company experiences that parallel Mike’s experience, and jb as well, further above. Those wishing to grow a business and create wealth pursue private ownership structures, the group of companies wishing to go public is over-represented by those who hope to cash out with smoke and mirrors and fortuitous market timing.

65 Curious April 19, 2016 at 1:20 pm

As a corp M&A/securities attorney, I can’t even begin to explain how much Mike’s experience from the business side echoes my experience on the law side.

Approx 1% of the mandatory disclosure is useful to investors.

66 rayward April 19, 2016 at 11:50 am

Tabarrok blames government for the decline in the number of public companies. He’s right, but not for the reason he indicates. The SEC has adopted a series of rules that make it easier for companies to raise capital without going through the complex and expensive requirements for a “public offering”, essentially redefining the meaning of a “public offering”. Companies now raise billions without ever doing a public offering. Of course, the increased concentration of wealth helps make it possible, but so do reforms adopted during the Obama administration.

67 Curious April 19, 2016 at 1:21 pm

Are you talking about Reg D? That was around long before Obama came along. Obama made it easier for small companies to go public . . . one would think that would increase the amount of companies going public, all else equal . . .

68 The Original D April 19, 2016 at 8:30 pm

I think he’s talking about equity crowdfunding rules that were enacted last year.

http://techcrunch.com/2015/03/27/sec-rule-change-gives-startups-an-a-for-capital-formation/

69 JWatts April 19, 2016 at 12:09 pm

A) It’s easier to get money as a Private company than a Public company today.

B) The paper work and regulatory requirements involved in being Public have gotten progressively more expensive over time.

This isn’t rocket science. It’s straight forward cause and effect.

70 Curious April 19, 2016 at 12:34 pm

+1. Probably shouldn’t look much deeper than that. It’s pretty obvious.

71 Alain Hamel April 19, 2016 at 1:38 pm

+1

This combined with private equity realizing the inefficieny of being public and gobbling up companies as noted above.

72 JWatts April 19, 2016 at 12:12 pm

Really, A is probably better stated as “It’s easier to get serious money as a Private company today than it was in the past.”

73 Curious April 19, 2016 at 12:33 pm

If a firm has access to capital other than going public, why in God’s name would a company want to be public in today’s environment. Expensive, unpredictable, time consuming – an all around pain in the ass.

74 rayward April 19, 2016 at 12:48 pm

This is an economics blog not a finance blog, but I will suggest that it would be helpful for readers to be offered explanations for phenomena other than the government did it. There are many reasons why companies go public, not least is to create a public market for the company’s stock. Why? So the founders and key employees who are rewarded stock can sell stock from time to time if they wish to diversify or just need cash. There’s also the arbitrage reason: if the public market values a company’s stock based on a 30 multiple and the company can expand by acquiring existing businesses based on a ten multiple, then that’s as simple as 30 minus 10. Then there’s the asshole avoidance reason: private equity partners can be real assholes and they typically demand seats on the board, or even control over certain decisions, whereas passive investors in the public market don’t; and lenders likewise can be real assholes, demanding repayment when the business is depressed and alternative sources of capital aren’t available, whereas passive investors in the public market have no choice but to go along for the ride.

75 Curious April 19, 2016 at 1:05 pm

Don’t disagree with a word of that, but you didn’t offer an explanation as to why companies are going public less; you offered an explanation as to why a company would go public. The entire point here is that the number of public companies has halved in about 20 years. M&A and increased technological efficiency certainly tell part of the story, but at the end of the day, the time and expense of being a public company is clearly not worth it to many, many companies at this point. I’d personally rather deal with a private equity asshole on my board than never ending proxies, 10-Qs, 10-Ks and all the rest.

76 rayward April 19, 2016 at 1:31 pm

See my first two comments. As you will see if you read them, the reasons companies don’t go public today are the same reasons companies used to go public yesterday. We live in Bizarro World.

77 JWatts April 19, 2016 at 2:54 pm

Your comment seems to ignore the obvious fact that the trend is drastically in favor of companies staying or becoming private.

78 Shane M April 19, 2016 at 11:11 pm

Probably a small part of it, but perhaps companies are more likely to go public now to cash out rather than raise cash.

79 prairie economist April 19, 2016 at 12:50 pm

The decline in dynamism Alex mentioned might be steeper, were it not for tech. Same thing for number of companies since the ’70s.

So, when looking at same-industries, the reduction in competition could be worse than the highlight numbers suggest.

80 byomtov April 19, 2016 at 2:13 pm

Do we know what has happened to the market cap of publicly traded firms relative to the value of all firms? Or perhaps the share of GDP represented by public firms?

I don’t see the point of discussing this without that information. If the share of GDP has not declined, then all it tells us is that big companies are getting bigger, possibly by buying smaller, previously public, companies. So now we have one public company instead of two, but the amount of production by public companies has not declined. (Unless it was stupid acquisition, as most are.)

81 Bill April 19, 2016 at 2:45 pm

+1 I am, today, going to file incorporation papers for 1,000 new companies so that we can correct this serious problem.

82 Dan Lavatan April 19, 2016 at 3:16 pm

The study title basically is deceptive. For one thing, foreign stock exchanges have grown considerably and while the number of competitors on the NYSE may have fallen, they have been replaced by companies trading or headquartered in China or Dubai. They also exclude firms trading on the pink sheets, or large private firms capitalized with publically traded bonds.

83 Vivian Darkbloom April 19, 2016 at 5:37 pm

“In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT].”

Well, that’s a bit of date cherry-picking. Some of this has nothing to do with SarBox. Is anyone surprised that a number of companies that went public in the dot.com boom are now bust or have been acquired in the tech consolidation? How many publicly traded internet service providers were there in 2007? Was the world a better place with a publicly traded Pets.com?

84 Vivian Darkbloom April 19, 2016 at 5:41 pm

Make that 1997.

85 carlolspln April 19, 2016 at 5:44 pm
86 justsayin April 20, 2016 at 2:38 pm

“In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT].”

Good riddance. Public ownership is a terrible idea. Bad incentives all around. Short termism, share price manipulation, outright fraud. Look at the percentage of people employed by privat companies in Germany vs. other economies. Explains most of Germany’s economic success. Would Lehman have gone bankrupt if it had remained a partnership?

87 Econchic April 20, 2016 at 10:57 pm

That last paragraph does actually keep me up at night. It is very much the picture of the snake eating its own tail.

By the way that investment from pensions has a double punch effect: 1. encourage monopoly from large firms, 2. by parking the money on Index Funds encourage poor performance and low innovation from those same large firms. So we get large, lazy, inefficient monopolies, worst of all the worlds.

88 Venkat April 21, 2016 at 12:19 pm

According to Ghemawat, globally, concentration effects in key sectors have decreased, not increased. http://blog.ghemawat.com/2012/05/default.aspx

89 Venkat April 21, 2016 at 12:26 pm

That may have been ambiguous. Decrease in a few key sectors, overall a slight increase from 32% to 35% share for top 5 firms in the 2000s. Not sure what macro effect would emerge if you weighted by GDP share.

“Between the 1980s and 2000s, I compared concentration in 11 industries. Six of these industries showed increases (carbonated soft drinks, cement, steel, oil production, aluminum smelting and paper/board) while five had decreases (automobiles, cargo airlines, copper, iron ore and passenger airlines). On average across these industries 5-firm concentration ratios, or the market share held by the top five biggest companies, did rise from 35% to 38% between the 1980s to the late 1990s. But the five-firm concentration ratios then declined back to 35% by the late 2000s. This is hardly evidence of an across-the-board trend toward rising concentration.”

“I later repeated the same type of analysis for 37 categories of consumer products. I found that average 5-firm concentration ratios rose from 32% in the early 2000s to 35% at the end of the decade. This rise of 3% was exactly the same as that in the earlier 11 industry sample, in which case the increase in concentration was later reversed.”

90 Yamini April 22, 2016 at 7:44 am

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91 Mike M April 28, 2016 at 12:47 am

Sorry to join the party so late.

This is the “cartelization” of America. The federal government understands that it is much easier and more cost effective for them to monitor and regulate a few large companies than many small companies. So, with the blessings of the rent seeking large companies, they have imposed regulations and taxes that have made it all but impossible for small companies to independently exist. The goal is to have large cartels in each industry that are regulated by the federal government. The companies will, in name only, be “owned” by shareholders, but the federal government, by virtue of its all encompassing control, will be the de facto owner. In other words, we will exist in a communist society.

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