Stock traders are so busy buying and selling public companies that they may not have noticed they have slimmer pickings.
Fewer than 4,000 U.S. companies are listed on major public exchanges, near the lowest number in the last 40 years, according to a recent working paper from the National Bureau of Economic Research. That's about half the number that investors had to choose from at the listing peak about two decades ago.
Like household income in the United States, subtle changes have concentrated economic clout in a much smaller group of companies at the top of the stack. Fewer companies control half of the net income, assets, cash, cash flow, dividends and total payouts than did a few decades ago — for example, 89 companies accounted for half of income in 1995, but in 2015 just 30 made up the same percentage.
"Fewer firms are public," said Ohio State University's Rene Stulz, who co-authored the new paper with Kathleen Kahle of the University of Arizona. "That's a problem for investors because, while they can easily invest in public firms, they can't in nonpublic firms. Few employees have access to investments in private firms through their 401(k)."
The problem isn't simply that fewer companies are opting to make initial public offerings in the first place. There has also been an increase in the number of firms that are delisting, often because the biggest firms have scooped them up in one of the recent waves of merger activity, according to another working paper written by Stulz and others. As smaller companies exit public markets or stay private, the market that's left behind is made up of companies that are on average bigger and older.
The data show that the listings decline is a U.S. phenomenon — most other developed countries haven't had trouble keeping up their number public listings. A likely explanation is that it's much easier today for small companies to get private funding, so there is little need for a small company to expose itself to public scrutiny and the set costs of being listed. While staying private isn't itself a bad thing, the decline of a robust public market in the U.S. is a serious issue.
"It is also bad for transparency, as more firms are hidden," said Stulz. "It is much better for capitalism and democracy if firms want to be public and benefit from being public."
The benefits of listing tend to increase as a company gets bigger. At the same time, the number of public firms has shrunk, the aggregate market capitalization of the market has grown substantially, meaning that each remaining public company is much larger than the equivalent company in 1975 or 1995. A wide variety of indicators also suggest that positive performance is much more concentrated in a smaller number of companies, according to the paper. That means that a few companies account for most of the income, assets, etc., across the entire selection of public companies.
In aggregate, some metrics are clearly getting worse over time for all public companies. The researchers found that cash flow performance has declined, even after adjusting for an increase in research and development (which is more prevalent now and accounted for differently). Cash flow was negative overall in each of the last three years — something that has happened only seven times since 1975. The problem was especially pronounced among smaller firms. Companies reporting losses made up less than 20 percent of the market before 1981 and exceeded 40 percent in 2001. Their share is about 38 percent today.
"In addition to the fraction of firms with losses increasing over time, many of these firms now have losses in multiple years in a row," said Kahle. "This was much less common back in the 1970s and 1980s."
In fact, if you look at just the top 200 firms with the highest earnings in 2015, they just about add up to the total earnings for the year. That means that every other publicly listed firm collectively earns nothing, said Stulz. So when we're talking about the market as a whole, we're really talking about high earners like Apple, Berkshire Hathaway and JPMorgan Chase, and very few of the other 3,500 or so public companies. Viewed in that way, the public market looks more like a complacent collection of huge firms that are propping themselves up with buybacks and cheap cash than a promising set of investment opportunities.
"As a whole, public firms appear to lack ambition, proper incentives, or opportunities," the authors wrote. "They are returning capital to investors and hoarding cash rather than raising funds to invest more."
