The American stock market has been shrinking. It’s been happening in slow motion — so slow you may not even have noticed. But by now the change is unmistakable: The market is half the size of its mid-1990s peak, and 25 percent smaller than it was in 1976.
“This is troubling for the economy, for innovation and for transparence,” said René Stulz, an Ohio State finance professor who has written a new report on these issues for the National Bureau of Economic Research.
When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.
Because the population of the United States has grown nearly 50 percent since 1976, the drop is even starker on a per-capita basis: There were 23 publicly listed companies for every million people in 1975, but only 11 in 2016, according to Professor Stulz.
This puts the United States “in bad company in terms of the percentage decrease in listings — just ahead of Venezuela,” he said. “Given the size of the United States, its economic development, financial development and its respect for shareholder rights,” he added, one might expect that tally to be climbing, not falling.
In his new paper, “The Shrinking Universe of Public Firms: Facts, Causes, and Consequences,” Professor Stulz surveyed the body of academic research on the topic. In an interview, he said that the casual observer may not entirely grasp the implications of the changes that have taken place.
“The headline is that the number of public firms is shrinking, but it’s not just that,” he said. Profits in the overall market are now divided among fewer winners. And as capital-intensive companies have been supplanted by those whose value is largely found in their intellectual property, the marketplace is less transparent — with troubling consequences.
Consider these big shifts:
■ The companies on the market today are, on average, much larger than the public corporations of decades ago. Fast-rising upstarts are harder to find.
In 1975, 61.5 percent of publicly traded firms had assets worth less than $100 million, using inflation-adjusted 2015 dollars. But by 2015, that proportion had dropped to only 22.6 percent.
Because of this, Professor Stulz said, “It’s not possible for the general public to invest in a diversified portfolio of really small, publicly traded companies in the way they could a few decades ago.”
■ Profits are increasingly concentrated in the cluster of giants — with Apple at the forefront — that dominate the market. For a far larger assortment of smaller companies, though, profit is often out of reach. In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market, according to calculations by Kathleen Kahle, a professor of finance at the University of Arizona, and Professor Stulz. In aggregate, the remaining 3,281 publicly listed companies lost money.
In theory, as a shareholder, you are entitled to a piece of a company’s future earnings. That’s one of the main arguments for buying stock in the first place. But the reality is that you often are buying a piece of a money-losing proposition. Aside from the top 200 companies, the rest of the market, as a whole, is burning, not earning, money.
■ A quirk of accounting is at the root of some of that profit deficit, especially for smaller and younger companies. Increasingly, value resides in intellectual property — “intangibles” like software and data and biological design — rather than in the production of physical objects like cars.
But under generally accepted accounting principles, or GAAP, which American companies must follow, research and development must be deducted from corporate income — and those charges can reduce or eliminate profits. (Capital expenditures — in physical things like factories — appear on corporate balance sheets, not income statements, and don’t reduce profits.)
Without deep knowledge of a company’s critical research — which businesses may be reluctant to share, for competitive reasons — it’s difficult for outsiders to evaluate a start-up’s worth. That makes it harder to obtain funding, and it may be partly responsible for certain trends: why there are fewer initial public offerings these days, why smaller companies are being swallowed by the giants, and why so many companies remain private for longer.
That creates opportunities for private equity firms, which have insider access to innovative start-ups that may never go directly to the public markets. Meanwhile, Main Street investors are consigned to a less diverse universe than they may realize.
There’s a broader problem. Our visibility into the inner workings of public companies isn’t great, but we know far more about them than we do private companies, which aren’t required to disclose nearly as much information.
And these changing dynamics mean we know far less about many of the creators of American profits and jobs than would otherwise be the case.
In a democracy in which corporations already have enormous clout, that is worth worrying about.
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