In a recent paper called “The Incredible Shrinking Universe of Stocks,” Michael Mauboussin, Dan Callahan, and Darius Majd at Credit Suisse delve into why there has been such a sharp drop in the number of publicly traded stocks in the U.S.
This is a U.S. phenomenon. In developed markets outside the U.S., the number of listed stocks has risen by about 50% since 1996. But in the U.S., the number has fallen by 50%. The Wilshire 5000 Total Market Index, which had close to 5000 public stocks in the 1970s, now has 3,816.
“Where Have All the Public Companies Gone?” Barry Ritholz asked in Bloomberg. It’s been a much-explored topic. “America’s stock market is shrinking,” declared CNN. And from a National Bureau of Economic Research (NBER) paper: “Is the American Public Corporation in Trouble?”
The reason for the decline is quite simply that U.S. delistings have outnumbered listings the last few decades. The main reason for delisting has been thriving merger and acquisition activity, where one public company buys another public company or a private company buys a public company.
At the same time, there have been fewer IPOs or initial public offerings. While more companies today qualify to go public than 20 years ago, fewer, it seems, are willing to do so.
One often-cited reason for this is the higher expense and regulatory burden of a public listing — though the decline in U.S. listings clearly predates Sarbanes-Oxley, which often gets blamed. Another is that there are abundant alternative financing options. Late-stage venture funding has been ample. Venture capital, private equity, and even large mutual funds have stepped up with the financing that allows private companies to grow while staying private.
The question is, does this matter?
The biggest worry is that fewer public stocks mean a smaller opportunity set. Unless investors can readily access venture and private equity funds, a fully diversified equity portfolio is out of reach. Interestingly, however, Mauboussin et al. note the proliferation of venture funds the last decade haven’t outperformed public markets. While venture capital funds launched in the 1990s outperformed public markets, those started since 2000 haven’t.
The other worry is that the public market is being taken over by older, larger companies that dominate their industries. Significantly more assets and cash flow are concentrated in the top 100 public firms than before. Moreover, Mauboussin et al. speculate that informational efficiency for older, larger firms is higher than it is for smaller, younger firms. That is, the public U.S. market increasingly is made up of large well-known companies where it is harder for active investors to gain an investing “edge.”