Are There Too Few Publicly Listed Firms in the US?

The number of publicly listed firms in the US peaked in 1996 at more than 8,000 firms. Doidge, Karolyi, and Stulz (2017, DKS) find that the number of listed firms in 2012 was about half of what it was in 1996. Using an econometric model that relates a country’s listings to various country characteristics, they conclude that US has a listing gap – that is, it has fewer listings than expected. That 2017 study concludes the US has too few publicly listed firms.

In our new paper, “Are there too few publicly listed firms in the US?”, we extend the analysis of DKS to 2023 and examine the evolution of the listing gap since 2012. This research makes it possible to assess whether the listing gap was a temporary phenomenon. We find that the listing gap increased by 32% from 2012 to 2023, so that at the end of 2023 the US listing gap is greater than ever. Though the listing gap keeps getting wider, it is doing so at a slower pace than it did in the first ten years after the listing peak.

Many economists and market watchers are likely to react to this new fact with the comment: So, what? Why should we care at all about the listing gap? Is it indicative of a serious problem for the US economy or just evidence of markets at work allocating resources even more efficiently? Some argue that there is no reason to be concerned about the listing gap when the aggregate market capitalization of listed firms increased by over 197% from 1996 to 2023. Such a reaction ignores that an increase in market capitalization does not necessarily mean an increase in welfare for a country. When examining the welfare implications of a decrease in the number of listed firms, it is important to assess carefully why the number of listed firms falls and the long-run implications of that decrease. We discuss considerations that should be taken into account by those who want to better understand the implications of the listing gap. Here, we just highlight some important issues researchers should address to help better understand the economic implications of the listing gap.

The role of the legal framework that divides firms into publicly listed and private firms. The Securities Act of 1933 and the Securities Exchange Act of 1934 govern the distinction between private and publicly listed firms in the US: private firms are those that do not sell securities to the public and public firms are those that do. Public firms are subject to costly disclosure rules and are more regulated than private firms. Over time, restrictions on private firms that limit their ability to raise funds, and hence, grow without being public, have softened considerably. It is no longer even clear that private firms are systematically at a disadvantage in raising funds compared to public firms of comparable size. Is it possible that this evolution has gone too far? Is it now too easy for firms to stay private? Is it possible that by enabling firms to stay private economic efficiency improves? Is it that the distinction between public and private firms has become so obsolete that a case can be made that most of the regulations that constrain public firms should be eliminated altogether?

Competition. If listed firms in an industry merge to increase their market power, the number of listed firms falls, listed firms become larger, and the listing gap increases. It is likely no accident that the listing gap has grown at a time of weak antitrust enforcement in the US. An important issue is whether the distinction between public and private firms plays a role in market concentration and in the increase in firm size on public markets. How much of the listing gap is caused by increased market concentration? What are the economic consequences of the increase in the listing gap caused by increased market concentration?

Dynamism. An important trend in the US is the decrease in the dynamism of the economy. In the Schumpeterian growth model, new firms innovate and displace incumbents through the mechanism of creative destruction. The number of new firms should keep increasing with economic growth. In an economy where the stock market opens the door to funding, do developments that make it harder for firms to enter the stock market have an adverse impact on innovation? Does the evolution of US stock market listings contribute to the decline of US dynamism?

Capital allocation. A key role of public markets is to help the economy allocate capital efficiently. They do so by making prices publicly available, so that investors, entrepreneurs, and corporations can better assess investment opportunities, and by facilitating capital raising. Private markets do not have the same mechanisms to help make pricing more efficient and to diffuse information about the value of securities. Further, with the absence of short-selling in private markets, prices may be excessively influenced by the most optimistic investors. While private capital is now widely available, it may be allocated less efficiently. Does the lower propensity of firms to be listed reduce the efficiency of capital allocation?

The increase in the listing gap raises many questions for which there are no consensus answers. As a result, we have no consensus on whether this gap is costly because it results from regulatory frictions that cause the US to have too few listed firms or whether it is beneficial because the growth of private markets has led to more efficient ways to fund some types of firms.

 

The full paper is available to download here.