The confirmation hearing last week for Jay Clayton, who has been nominated to head the Securities and Exchange Commission, focused on the continued sluggishness of the market for initial public offerings. Senators pushed the nominee to do something, anything, to revive it.
The problem is that there is no magic wand — including deregulation — that can fix the decline.
The problems were recently documented in a research note by Credit Suisse titled "The Incredible Shrinking Universe of Stocks." The bank documented that the total number of companies listed on the United States stock market plummeted by nearly half, to 3,671 last year from 7,322 in 1996.
Companies get bought or go out of business, but new companies are not replacing them. In 1996 there were 706 initial public offerings, but in 2016 there were only 105. The downturn affects all sectors, and last year there were only 30 new private equity offerings, the "lowest level since 2009," according to Credit Suisse.
Such shrinkage has prompted hand-wringing for over a decade. At Mr. Clayton's hearing, at least five senators brought it up, pointing to the regulatory burdens on companies going public.
There's only one problem with casting regulation as the villain: There's not much evidence for it.
In 2012, Congress took a stab at fixing the regulatory issues in the Jump-Start Our Business Start-Ups Act. The changes have been well-received by entrepreneurs. Some provisions, like the one allowing for confidential review with the Securities and Exchange Commission, have been particularly popular.
But the JOBS Act has not spurred initial public offerings in any meaningful way. One study found that it may — may — have resulted in 21 more new offerings a year, but given the small numbers in the analysis, that is questionable.
Moreover, the JOBS Act has done nothing to revive the market for small companies, those with a market capitalization of under $75 million. They still number less than a handful each year.
And while fingers get pointed at regulation like Sarbanes-Oxley and Dodd-Frank, the number of initial public offerings fell off the cliff in 1996 — years before either bill was passed. So there must be something more here.
Those who have examined this issue have come up with a number of possible reasons.
The first theory is that the decline is a result of structural changes in the market ecosystem. Jay Ritter, a professor at the University of Florida, has argued that the dearth of initial public offerings has been caused by companies selling out quicker.
The Credit Suisse paper also brings up this theory, noting that mergers are the major cause for companies to be delisted from a stock exchange. It appears that this deal activity has spread to the private markets, co-opting the process of taking companies public.
For example, Cisco Systems purchased AppDynamics on the eve of its market debut. And acquirers seem willing to pay top dollar in these instances, as research and development by many large corporations now consists largely of acquiring smaller, usually private, companies.
This is aptly illustrated by the buying sprees of Google and Facebook, which took candidates to go public — like Instagram, Nest, Waze and WhatsApp — out of contention.
Another possibility involves demand. In a paper that I wrote with Robert Bartlett and Paul Rose, we explore this theory. The drop-off in activity is largely attributed to the disappearance of the small offering.
In 1996, average proceeds for an initial public offering were $85.7 million, and 54 percent of these offerings were considered small, with a market capitalization below $75 million in inflation-adjusted dollars. In 2014, however, average proceeds were $186.4 million and only 4 percent of offerings were small.
The market for new issues has moved toward liquidity and bigger stocks. Mutual funds prefer making big investments rather than small ones for liquidity and administrative purposes — lots of small investments simply require more people and more monitoring.
A third possibility is that companies simply no longer need the public market. The private markets are more efficient, and financing is readily available from venture capitalists and banks.
There are even markets and mechanisms that exist not only to allow for financing, but to allow for selling employees' and founders' shares in private markets. In addition, the JOBS Act allowed companies to expand the number of shareholders and still be private, a change that encouraged companies to remain private.
There are other theories. One of these notes that the 1990s saw a surge in I.P.O. activity and that we are just back to what the activity was in the 1970s and '80s. Who is to say what is a normal market?
Another possible reason is that companies are shying away from the public markets to avoid shareholder activism, short-termism and the glare of public scrutiny.
Yet the growing use of dual class shares and staggered boards by new companies, measures that help founders retain control, argues against this need. And they are tools that can be used by any company — even Shake Shack went public with dual-class stock.
The bottom line is that while there might be rational reasons to reduce regulation on capital raising — to make it easier and less expensive — we are kidding ourselves if we think that simply deregulating will bring back initial public offerings.
The task is much harder. The Securities and Exchange Commission, for one, could help build an infrastructure for buying small company offerings. Allowing mutual funds more latitude to buy illiquid small investments and to change their compensation structures if they do would be a big step.
In addition, we could explore more novel ways of bringing companies to the public markets. Special purpose acquisitions companies — those created to buy a private company and bring it public — have attracted criticism, including from me. Yet a recent $900 million deal in the energy business shows one possible way to take more companies public, provided there are investor protections.
Then there is the argument that maybe we shouldn't do anything, given how hard it will be. The idea behind the public markets is to provide capital funding. But if the private markets are now efficient and capable of providing even less expensive capital at lower cost, maybe we should be fine with the current state of affairs.
Still, that overlooks the fact that for most of us, our retirement money is in the public markets. We should be worried about all of this money flowing into a smaller and smaller group of companies.
One answer is to allow mutual funds to invest more in private companies. Already 26 mutual fund groups had $11.5 billion invested in late-stage companies in 2016, according to Credit Suisse.
That's one answer, but that will result in yet more intermediaries. The better solution is to push more companies to the public markets. Deregulating is one thing, but the real work will require more innovative thinking from market regulators. That's your homework, Mr. Clayton.
On a personal note, I've been writing the Deal Professor column for DealBook for over nine years now, and this will be my last column before I take an extended sabbatical to work on other projects.