The decline of public companies

Where Have All the Public Companies Gone? Some businesses are staying private. Others are getting bigger. That’s not necessarily a problem.


The people who supervise the U.S. stock market are grappling with what they see as a troubling trend: One of the great innovations of Western capitalism -- the public company -- appears to be losing ground. Before deciding what to do, they should first ask whether this is a problem at all.

Since the creation of the Dutch East India Company in 1602, the public company has been a central fixture of the global economy. It enables enterprises to raise money from the broadest possible group of investors. It allows just about anyone -- from hedge-fund magnates to regular folk -- to take a stake in what could be the next Apple Inc., or gain a say in how some of the world’s biggest businesses are run.

As such, it has brought a measure of democracy to the corporate world. Lately, though, the universe of such companies has been shrinking in the U.S. New businesses have been offering shares to the public at less than half the rate of the 1980s and 1990s. Mergers and acquisitions have eliminated hundreds more. About 3,600 firms were listed on U.S. stock exchanges at the end of 2017, down more than half from 1997.

Granted, size might be an issue in itself. Fewer, bigger companies could reflect an unhealthy degree of industry concentration. Again, though, it's dangerous to generalize: In many cases, concentration could be benign -- a natural outcome of technological innovation and globalization, which have allowed the most productive and profitable companies to dominate. Where lack of competition is a problem, it's best addressed case by case through antitrust policy, as the Justice Department is seeking to do in the media sector.

Whatever the cause -- ill-judged regulation, the drive to accrue market power, other factors altogether -- the shifting pattern of corporate form raises big questions. Are the traditional purposes of public ownership under threat? Are businesses being deprived of capital? Are people being excluded from attractive investment opportunities? Do shareholders still have a say in how companies are run?

Consider each in turn. First, access to capital. Once upon a time, selling shares to the public was an important way for companies to raise money -- and for early investors to cash out. That’s no longer the case. Companies such as Uber and Airbnb can attract tens of billions of dollars while remaining private. And venture-capital firms increasingly sell their holdings directly to existing public companies, which have the global reach needed to expand young businesses quickly (think Facebook buying WhatsApp).

....Jay Clayton, chairman of the Securities and Exchange Commission, has called the seeming decline of the public company “a serious issue for our markets and the country.” So far, nonetheless, he has trodden lightly -- and that's wise. Tweaks such as allowing pre-IPO companies to file draft documents confidentially, and possibly “test the waters” by holding private talks with investors, pose little risk. But it would be a mistake to go further. The public company is not as imperiled as the numbers suggest, and the market for capital isn't broken.
Where Have All the Public Companies Gone? There are 3,671 domestic listings today, down from 7,322 in 1996. Investors can feel the difference.


The media and the public pay a lot of attention to broad stock market indexes, but many of the most well-known measures aren’t what they seem. The Wilshire 5000, for example, contains roughly 3,500 companies. There haven’t been 5,000 domestic stocks to include in the index since 2005.

The number of public companies in the U.S. has been on a steady decline since peaking in the late 1990s. In 1996 there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671. Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996.

Companies are going public later in their lifespans—if they ever do at all. The dearth of IPOs has led to a 50% increase in the average age of public companies, from 12 years in 1996 to 18 years in 2016. Jeff Bezos founded Amazon in 1994, taking the company public three years later with an enterprise value of approximately $600 million. From 1997 to 2002 public investors enjoyed a 12-fold appreciation in Amazon’s stock. Conversely, Mark Zuckerberg waited until Facebook was eight years old before taking it public. At the time of Facebook’s IPO in 2012, the social-media company had a market value of more than $100 billion.

The trend away from IPOs has benefited private market players at the expense of everyday investors. With companies like Uber, Airbnb and other successful startups delaying their IPOs for so long, there is little prospect for public returns on a scale similar to those enjoyed by Amazon’s early stockholders. The aversion to public listings isn’t limited to the technology sector. Microcap, small-cap and midcap stocks have all but disappeared from U.S. exchanges. Over the past 20 years, the average size of a publicly listed company in the U.S. has risen nearly fourfold, after accounting for inflation.

As a large number of yesterday’s “growth stocks” have migrated to private portfolios, so too has the diversifying economic exposure they provide. The dispersion of stock returns—the average difference in monthly returns across all stocks—has declined as a result, narrowing the gap between the winners and losers. Less dispersion reduces the value of stock picking, and investors have responded accordingly. Since 2000, roughly $1.7 trillion has been invested using passive strategies like exchange-traded funds and index mutual funds. At the same time, funds pursuing active strategies have experienced $1.4 trillion in outflows.
Looking Behind the Declining Number of Public Companies


US listings dropped after the dot-com bubble, but the market has largely stabilized, and US public companies today are much larger than in the past. During the dot-com peak in 1996, US listings hit a record high of more than 8,000 domestically incorporated companies listed on a US stock exchange with an average market capitalization of $1.8b in today’s dollars. The number of domestic US-listed public companies decreased precipitously through 2003, with almost 2,800 companies lost because of M&A activity and delistings. By 2003, there were 5,295 domestic US-listed companies. The loss of domestic US-listed companies in 1996–2003 represents 74% of the loss from 1996 to date.

Comment: Images above are logos are of delisted or defunct companies. Monsanto is being acquired by Bayer. Of the above: I formerly worked for Monsanto, Digital and International Multifoods. 


  1. I've got connections in my industry to Digital as well. One thing that comes to mind as a reason for fewer public companies is not just Sarbanes-Oxley, but also cheap loans from the Fed. It changes the calculus between issuing stocks and selling bonds.

    Plus, you've got owners who realize that what makes their company tick would be gone once the mutual fund guys get their guys on the board of directors--think Hobby Lobby or Chick-Fil-A.

  2. Jim, I'm glad to see you got out of Monsanto. That has got to be one of the most evil, corrupt companies on the globe. Kudos to you for walking away.


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