In 1996, there were more than 7,300 companies listed on the US stockmarket. Guess how many there are now? You might imagine that the number is a lot higher. After all, America is the home of shareholder capitalism. You’d be wrong. That year was the peak. The number of US-listed companies has been falling for the past 20 years. There are just under 3,700 (although their combined market capitalisation has more than doubled).
Behavioural finance expert Michael Mauboussin and his Credit Suisse colleagues have explored the causes in a new paper. The mechanics are easy to understand. Merger and acquisition activity has taken many listed companies off the exchange, while the pool has not been topped up sufficiently by new companies going public. But why?
Companies go public for various reasons – to fund expansion or to allow owners to sell out, for example. But being public has costs – scrutiny, regulation and a need to communicate regularly with shareholders. Two factors have made it easier for companies to avoid this hassle, says Mauboussin. First, today’s tech-heavy companies are less capital-intensive than yesterday’s manufacturers – you can run a big firm with fewer people and equipment than in the past. Second, it has become far easier for companies to raise funds privately, so they can delay or avoid going public. Since 1996, the average age at which a US company lists has risen from 7.8 to 10.7 years old.
This has created a fast-growing “unicorn” class of private firms that are valued at more than $1bn, but which small investors struggle to access. Instead, they are left with a public market dominated by older businesses which make larger profits as a result of their industries being “more concentrated” and less competitive than they were 20 years ago.
This gives rise to two concerns. A smaller market with more analysts crawling over it should, says Mauboussin, be “more informationally efficient”. So it’s harder to find value or an “edge” which might let you beat the market, which partly explains the popularity of index funds (that track the market) over active funds (why pay a stock-picker when the most exciting stocks are off the market?).
A longer-term concern is that, as John Authers in the Financial Times points out, the rising profitability of the listed survivors suggests they are subject to “rather less… creative destruction” than they were – which “does not betoken dynamism”. The good news is that this shrinkage is not a global phenomenon: it’s limited to the US. But it does mean there’s less reason than ever to pay for anything more expensive than a tracker fund if you want to invest in US stocks.