There are two interesting trends* with respect to public companies that have been occurring: (1) the number of public companies has shrunk dramatically over the past 20 years, and (2) the average lifespan of a public corporation has shortened over the past 100 years.
where are all the public companies?
The number of public companies has been declining for decades. In 1996, there were about 7,300 domestic companies listed on U.S. stock exchanges. As of the end of 2017 there were about 3,600 – a 50% decline. Interestingly, over that same time period the number of publicly-listed companies on developed country foreign exchanges has increased by 50%.
Source: Credit Suisse (note that the y-axis on this chart is truncated which can give a distorted view, but the data is good)
Why the decline in publicly traded companies? There are number of likely reasons:
- Fewer IPOs. The number of corporations in America (public and private added together) have held steady over the past few decades, but fewer companies want to list their shares on public exchanges. About 20 years ago there were about 300 IPOs per year on average while today the number of IPOs averages about 150 per year. Notably, other developed countries have seen an increase in IPOs over the past 20 years, so the decline in IPOs is not a world-wide phenomenon.
Bureaucracy and regulation is a reason for the decline in IPOs with the Sarbanes-Oxley Act of 2002 being a key change leading to fewer IPOs. That law, and other regulations, has made the costs of being a public company much higher.
Much of the loss in IPOs has occurred in smaller companies where the costs of complying with regulation is much higher relative to their revenues. This has led to smaller companies turning to private funding rather than the public markets. Note that companies that do go public are waiting longer to float and IPO.
Companies backed by venture capital firms are much more likely to be sold to another company than to go public.
Source: Bloomberg; Jay Ritter University of Florida
- The rise in popularity of “alternative” classes such as venture capital and private equity has created greater access to capital funding beyond the public markets. Firms needing capital can more easily access the private markets than previously, providing an attractive alternative to being public.
- Established public firms are more likely to exit the public markets than previously. Elon Musk may be in hot water for prematurely announcing plans to take Tesla private, but the general idea of taking a public company like Tesla private is becoming more common.
THe life-span of companies is shrinking
Another trend is that the lifespan of public companies is shrinking. According to a Richard Forester of Yale, the average lifespan of an S&P company dropped from 67 years in the 1920s to 15 years today and he estimates that 75 percent of the current S&P 500 firms will be replaced by new firms over the next ten years.
Source: InnosightSimilarly, a study out of the Santa Fe Institute found that the half-life of corporations, at every age group and industry, was about 10 years. That means that for any group of public companies existing today, only about half of them will exist in 10 years.
Why does this happen? That is a big question without a simple, clear answer. One reason is that innovation leads to “creative destruction.” Creative destruction occurs where new innovations, products and services arise and bring about the demise of what existed before it. In our economy is such that it is difficult to adapt and thrive over multiple product and innovation cycles. Creative destruction as a cause of corporate mortality can be seen in that corporate mortality is highly correlated with an index of corporate innovation called the “Shift Index” developed by Deloitte.
How do these public companies die?:
Source: Credit Suisse (note that this chart is of firms leaving the S&P 500 – some of them – many in the “other” category – left due to shrink in market capitalization)
*The Trend is Not Necessarily Your Friend
Here are a few directly related WSJ articles that are interesting (with great charts that I couldn’t paste here).
https://blogs.wsj.com/moneybeat/2017/06/23/stockpicking-is-dying-because-there-are-no-more-stocks-to-pick/
https://www.wsj.com/articles/americas-roster-of-public-companies-is-shrinking-before-our-eyes-1483545879
https://www.wsj.com/articles/small-ipos-are-dying-thats-good-1510586283?mod=article_inline