What’s Driving the Dramatic Reduction in Public Firms?

Research by Professor Roni Michaely and co-authors points to a rise in M&As and decline in IPOs.

The number of publicly traded firms in the U.S. has fallen by 50 percent in the past 20 years according to recent research by Roni Michaely, Rudd Family Professor of Management and professor of finance at the Samuel Curtis Johnson Graduate School of Management.

That means less competition for big corporations, enabling them to wield market power to bolster their bottom lines and deliver handsome profits to shareholders, according to Michaely.

“The reduction in the number of public firms has been dramatic, and it has happened across practically all industries,” he said. “The industries that have seen the largest reduction in the number of firms are also the industries that have had the greatest increases in profitability.”

While analyzing more than 40 years of data on publicly traded firms in the U.S., Michaely and two colleagues, Gustavo Grullon of Rice University and Yelena Larkin of York University, found that the number of firms listed on U.S. stock exchanges began falling in the late 1990s.

Today, there are roughly half as many firms listed on U.S. stock exchanges as there were in 1997 and fewer than there were in the early 1970s, when U.S. GDP was a third of what it is today. The findings are detailed in the working paper, “The Disappearance of Public Firms and the Changing Nature of U.S. Industries.”

The researchers examined several possible explanations for the altered competitive landscape. First, they asked whether the vanished U.S. public firms had simply been replaced by foreign firms or private U.S. companies.

“We found that the decline in public firms was not compensated for by more private firms,” Michaely said. “When you look at census data, you find that the picture for private firms remained basically the same during this period.”

Also, there was no evidence of intensified foreign competition. The share of imports of total revenues has been flat since 2000, indicating that U.S. firms have expanded as fast as import growth.

Did public firms dwindle because they were in distressed or dying industries? That’s another possibility the researchers considered. But in analyzing the reasons that firms exited public exchanges, the researchers found that liquidations and involuntary de-listings were not significant factors.

In the end, the research team concluded that the dramatic decline in public firms stemmed both from increases in mergers and acquisitions and from declines in initial public offerings – developments that came about as firms came to realize that becoming bigger and having fewer competitors is good for their bottom line.

“The majority of IPOs we’ve seen have been the Googles and Facebooks of the world.” — Professor Roni Michaely

As the 21st century unfolded, mergers and acquisitions reduced the number of public firms while creating larger and more powerful players. IPOs dropped after the bursting of the dot-com bubble in the late 1990s and early 2000s. While the number of IPOs has varied from year to year since then, the overall trend has been downward.

“It’s not just that there are fewer IPOs but that the firms that have gone public in the last 20 years are different. The majority of IPOs that we’ve seen have been the Googles and Facebooks of the world,” Michaely said.

Why the competitive landscape changed when it did isn’t yet clear, although Michaely is willing to speculate.

The Justice Department under President George W. Bush took a more lenient approach to mergers and acquisitions about the time the shift toward fewer and more powerful corporations was getting under way, Michaely noted.

Also, the spread of the Internet and advances in computers and communications probably played a role since investment in technology of the scale needed is something big business can do more easily, according to Michaely.

“Many people, myself included, believed that the Internet and other changes in technology would level the playing field for companies,” he said. “It seems to have done the opposite. To succeed today, investments in technology are so substantial that only large companies can afford to make them.”

Michaely believes that policymakers in the United States should look closely at this shift in the competitive environment for U.S. industries and the possible consequences for the public.

“We have significantly fewer and more profitable companies in this country. It’s really great for shareholders. I’m not so sure it’s great for the consumers,” he said.

— Robert Preer