The Shrinking Universe of Public Firms: Facts, Causes, and Consequences.

• Author: Stulz, Rene M.

There are fewer firms listed on U.S. exchanges than 40 years ago. In 1976, the United States had 4,943 firms listed on exchanges. By 2016, it had only 3,627 firms. From 1976 to 2016, the U.S. population increased from 219 million to 324 million, so the U.S. went from 23 listed firms per million inhabitants to 11. These changes are dramatic and they raise a number of important questions: How did we get here? Why did the universe of public firms shrink so much? Will it keep shrinking? How have the listed firms changed as a result of this evolution? And perhaps most importantly, what is the overall economic impact of such dramatic change in the composition of listed firms? The research I report on in this summary addresses some of these questions.

How Did We Get Here?

The decrease in the number of listed firms is a recent phenomenon. Figure 1 shows the evolution of the number of listed firms since 1975. (1) The number of listed firms follows an inverted U-shape: It increased by 54 percent from 1975 to the listing peak in 1997 and decreased strongly since then. During the period from 1975 to the listing peak, the number of listings decreased in only eight years with no more than three years of consecutive declines. In contrast, the number of listings dropped every year since 1997, except for 2013.

When listings drop, more firms delist than new firms acquire a listing. (2) U.S. firms typically acquire a listing through an IPO. Firms delist because they have to when they no longer meet the exchange's listing requirements (delists for cause), when they want to go dark or private, or because they are acquired. The largest contributor to the drop in listings is the fact that we have had an extremely large number of mergers. Delists for cause constitute the second-most important cause for delists. Finally, though voluntary delists have garnered considerable attention, they are not economically important in explaining the decline in listings. It is often stated that Sarbanes-Oxley Act of 2002 plays an important role in the decline in listings because of firms going private or dark. The problem with that view is that the number of firms that voluntarily delist is small and the wave of delists is well advanced by the time Sarbanes-Oxley affects smaller firms.

An obvious question about the evolution in the number of listings is whether it is unique to the U.S. (3) Not surprisingly, there are other countries that have lost listings since 1997, but few have experienced a greater percentage decrease in listings. Further, the U.S. is in bad company in terms of the percentage decrease in listings--just ahead of Venezuela. The literature shows that the number of listings per capita is higher for more developed countries and for countries that respect shareholder rights more. (4) Estimating a model that explains the number of listings per capita around the world, it turns out that the U.S. has developed a listing gap and that the size of this gap has become large in recent years. In the 1990s, the U.S. had as many listings per capita as expected based on the relation between listings and country characteristics. However, by 2012, the U.S. had more than 5,000 too few listings given the size of its population, its economic development, its financial development, and its respect for shareholder rights.

A country's industry composition changes all the time. Hence, we would expect some industries to lose listings and others to gain listings. A striking feature of the decrease in listings since 1997 is that it affects all industries in the following way: If one computes the ratio of the number of listed firms to the number of private and public firms with more than 20 employees, this ratio decreases for all industries.

In the debates concerning the decrease in listings, much has been made of the decrease in IPOs. This decrease in the U.S. occurs during a...