It’s easy to misinterpret the numbers. When you look at a graph showing the number of U.S. public companies from 1980 to 2020, and see a 50 percent drop after 1996, it’s tempting to think that going public has lost its appeal in the U.S. This might lead to doubts about the competitiveness of the U.S. economy and stock market.
Things look worse when you compare the U.S. with other countries. While the U.S. had more than 7,000 public companies in 1996 and fewer than 4,000 in 2020, other advanced economies saw their public company count grow from 4,000 to 20,000 over the same period. Developing countries also went from fewer than 1,000 public firms in 1996 to 20,000 in 2020.
Many people are concerned about this trend. In 2018, SEC commissioner Robert Jackson Jr. expressed worry that private capital raising by exciting young companies leaves retail investors out of much of the nation’s economic growth.
Researchers at the Tuck School took a closer look at this issue, examining not just the number of public firms but also the companies they acquired or merged with.
Listing dynamics
The term “listing dynamics” refers to the reasons why the number of public companies changes. The number increases when private firms go public through IPOs or when a public firm spins off a new one. This growth is often seen as a positive economic sign. But is a decline always bad? Not necessarily.
A drop could come from bankruptcies or public firms being bought by private investors, which isn’t good for markets. But it could also be the result of two public firms merging, which can create synergies worth hundreds of millions of dollars (good for markets). These mergers aren’t factored into the official public company count, so the researchers created a “merger-adjusted” list that includes not just listed companies but also private and public companies that were acquired by public firms.
To clarify, the researchers presented three graphs:
The first shows the global number of public companies from 1980 to 2020. The U.S. count falls sharply, while the total number for 73 other countries steadily rises.
The second graph compares the actual U.S. public company count to the merger-adjusted count. The adjusted number, which accounts for firms acquired by public companies, erases much of the decline in U.S. listings.
The third graph shows how much the remaining U.S. public firms contribute to employment, GDP, R&D, and patents. Despite the drop in listings from 8,000 to 4,000, these firms contribute as much or more to the economy as the larger number of firms did before 1996.
“Most people who haven’t looked into mergers blame the drop in U.S. public firms on fewer IPOs,” the researchers explain. “While IPOs have decreased since 1996, if you factor in mergers, you get a different picture: U.S. firms on major exchanges are attracting private and public targets in ways that more than make up for the IPO decline.”
The researchers also looked at the situation outside the U.S. Surprisingly, over 80 percent of stock exchanges in other countries saw a nearly 50 percent drop in listed firms at different times, though these drops are averaged out across countries. Unlike the U.S., these declines weren’t offset by firms acquiring public or private targets.
The researchers conclude that U.S. stock exchanges offer a key advantage: a strong market for corporate takeovers, creating wealth for both acquiring and target firms.
