Is the Public Corporation Really in Eclipse? Evidence from the Asia‐Pacific

• Date: 01 February 2017
• Author: Dawoon Kim,G. Andrew Karolyi
• Published date: 01 February 2017
• DOI: http://doi.org/10.1111/ajfs.12165

Is the Public Corporation Really in Eclipse?

Evidence from the Asia-Pacific*

G. Andrew Karolyi**

SC Johnson College of Business, Cornell University, United States

Dawoon Kim

SC Johnson College of Business, Cornell University, United States

Received 17 January 2017; Accepted 9 February 2017

Abstract

While the US has experienced a 50% decline in the number of publicly listed corporations

since the late 1990s, there has been an 800% increase in the Asia-Pacific region. Notwith-

standing these divergent paths, there are strikingly similar patterns in both regions in the

evolution of corporate financial policies. Asia-Pacific firms invest more in R&D and less in

capital expenditures, as do US firms. They have higher cash holdings as a fraction of total

assets. Dividends as a fraction of income are lower, the ranks of dividend-paying firms in the

Asia-Pacific are declining, and, as in the US, share repurchase activity has grown. Concentra-

tion ratios of assets, income, cash, and dividends among US firms have risen to the already

high levels seen in Asia-Pacific markets. Changes in corporate financial policies that appear

to reveal poorer incentives to invest cannot explain the dramatically different shifts in the

landscape for public companies in the US and the Asia-Pacific region.

Keywords New listings; Corporate financial policy; Investment; Financing; Asia-Pacific mar-

kets

JEL Classification: G15

1. Introduction

Jensen (1989) predicted that publicly listed corporations would be supplanted by an

alternative corporate structure, or “organizations that are corporate in form but

*This paper is based on the keynote address by G. Andrew Karolyi to the Korean Securities

Association’s December 2016 Conference on Asia-Pacific Financial Markets, Seoul, Korea.

The authors are grateful to Kwangwoo Park and Bong-Chan Kho for their generous invita-

tion and their hospitality during the conference. Comments from Ren

e Stulz are also grate-

fully appreciated.

**Corresponding author: G. Andrew Karolyi, Johnson Graduate School of Management, Cor-

nell University, 337 Sage Hall, Ithaca, NY 14853, USA. Tel: +607-255-2153, Fax: +607-254-

4590, email: gak56@cornell.edu.

Asia-Pacific Journal of Financial Studies (2017) 46, 7–31 doi:10.1111/ajfs.12165

©2017 Korean Securities Association 7

have no public shareholders and are not listed or traded on organized exchanges”

(p. 61). Takeovers, corporate breakups, divisional spin-offs, leveraged buy-outs, and

going-private transactions were to become the visible mechanisms through which

this massive organizational change was to take place. The motivation for this

change—what he called “the central weakness of the public corporation” (p. 61)—

was the inevitable conflict between owners and managers over the control and use

of corporate resources. In other words, gains in operating efficiency, employee pro-

ductivity and greater shareholder value would arise organically from the elimination

of “gross corporate waste and mismanagement” (p. 62). Most interestingly, he pre-

dicted that a transformation of the governance and financial structures of public

companies would take place not only in the US, but all over the world.

Jensen’s prophecy of an “eclipse” has resonated among many market watchers

in the US with the remarkable decline in the number of public corporations since

the late 1990s.

1

Scholars are seeking to unravel the puzzle. Doidge et al. (2017)

reveal that the number of public companies on major stock exchanges in the US

reached a peak of around 8000 in 1996 but this has since declined dramatically by

half to just under 4000 in 2015.

2

However, somewhat as a challenge to the Jensen

hypothesis, Doidge et al. (2017) do show that this experience has been unusual rela-

tive to most other developed markets around the world, which led them to coin the

term the “US listing gap” in reference to the unusual US phenomenon. Indeed,

Asia-Pacific stock markets have seen dramatic 500% or higher increases in the num-

ber of publicly listed companies over this same period. Market valuations have also

soared in the Asia-Pacific region. Perhaps the most provocative finding of the

Doidge et al. (2017) study is the fact that only half of the explanation for the US

listing gap relative to other countries around the world stems from the unusually

low rate of new listings; the other half of the explanation arises from an unusually

high rate of delisting activity, particularly by means of a historically high rate of

acquisitions.

In a separate study, Kahle and Stulz (2016) examine the evolution of corporate

financial policies among US public corporations during this massive decline in the

number of US public companies with the goal of uncovering signs in support of

Jensen’s predictions about a transformation in their financial structures. They show

that these fewer US public corporations do invest differently (R&D investments

1

Among many other media stories, see “Wall Street’s Dead End,” The New York Times

(February 13, 2011), “Missing: Public Companies –Why is the Number of Publicly Traded

Companies in the US Declining?,” CFO Magazine (March 22, 2011), and “The Endangered

Public Company: The Big Engine that Couldn’t,” The Economist (May 19, 2012). FactSet’s

Insight Report, titled “2016 IPOs Hit Lowest Count Since 2009” (December 29, 2016) reveals

a 7.3% decrease in initial public offering (IPO) proceeds to $7.1 billion from 109 offerings, a

35% decline from 2015.

2

Other scholars who have studied this phenomenon include Gao et al. (2013), Doidge et al.

(2013), Ciccotello (2014), Rosett and Smith (2014a,b), and Grullon et al. (2016).

G. A. Karolyi and D. Kim

8©2017 Korean Securities Association