Credit: Dries Buytaert
In 1996, there were 7,300 public companies in the United States. Today, that number has dropped to 4,300.
Source: World Bank and Statista
One might assume that, in an age of rapid technological advances, global expansion, and record-breaking stock market highs, the number of public companies in the United States would have skyrocketed over the last three decades. It seems intuitive—more growth, more opportunity, more companies going public.
However, this trend is not merely a statistical anomaly; it reflects a broader transformation in how firms navigate the financial landscape. The implications for venture capital, private equity, and regulatory environments are profound, reshaping the very fabric of capital markets and creating new opportunities and challenges for both investors and businesses.
Theories Surrounding the Drop
The Dot Com Bubble, which occurred in the late 1990s and early 2000s, was characterized by inflated stock prices for internet-based companies driven by speculation and enthusiasm. When the bubble burst in 2000, many of these companies faced bankruptcy or delisting, leading to a significant decline in the number of public firms and prompting a more cautious approach to initial public offerings (IPOs) in subsequent years.
Despite this decrease, the profitability of public companies has notably increased, with profits rising from 4.5% of gross domestic product in 1996 to 8.3% at peak in 2021. This trend indicates that, while fewer firms are publicly listed, those that remain are more efficient and profitable than ever, operating in a market at all-time highs.
However, the reasons behind the decline in public companies remain uncertain. Although the surge in firms during the late 1990s may have included many that were unsustainable, the ongoing mystery surrounding the continued decrease in public company listings warrants further exploration.
Impact of Regulation
Since 2002, public companies have faced increased regulation aimed at restoring transparency and investor confidence. The Sarbanes-Oxley Act (SOX), passed in response to corporate scandals like Enron and WorldCom, introduced significant compliance burdens. While it is widely accepted that these regulations were necessary to restore trust, it is a matter of debate whether these regulations are responsible for the decreasing number of public firms.
SOX, particularly Section 404, imposes stringent internal control assessments and external audit requirements, creating high compliance costs—especially for smaller firms. As a result, many companies now choose to remain private to avoid the expenses and scrutiny that come with being public. Public companies must disclose sensitive information, which competitors and customers could use to their advantage.
Traditionally, public companies provided access to capital for growth, R&D, or debt repayment. However, with the rise of private equity and alternative funding options, this advantage has diminished, making private ownership more attractive. Public companies also face increased media and shareholder scrutiny, creating pressure for short-term performance through quarterly disclosures. This can lead to short-term decision-making, such as aggressive accounting practices to meet earnings expectations. Furthermore, annual shareholder meetings, once venues for major investor input, have shifted to platforms for special interest groups. Private companies, by contrast, can engage with investors discreetly and maintain greater strategic control.
Despite the widespread belief that SOX and other regulations have contributed to the decline in public companies, some scholars have rebutted this view. They note that the number of public firms had been declining before SOX's passage, and IPO activity actually rose in the years immediately following its enactment.
Source: Half the Firms, Twice the Profits: Harvard Law School Forum on Corporate Governance (Jay P. Ritter’s IPO database)
While it is challenging to identify the exact reason for the decline, it would be incomplete to overlook the impact of increased reporting requirements. As Jaime Dimon, CEO and Chairman of JPMorgan Chase, stated, intensified reporting, rising litigation costs, strict regulations, rigid board governance, increased shareholder activism, reduced flexibility in compensation and capital, heightened public scrutiny, and pressure to meet quarterly earnings are all factors driving companies away from public markets.
Private Financing Options
The rise of private financing options, particularly through venture capital and private equity, has transformed the corporate landscape. Recent regulatory changes have led more companies to stay private longer, reducing the importance of IPOs in their growth cycles. In 1999, the average U.S. technology firm went public after four years; by 2019, this average had increased to eleven years, highlighting the growing trend of companies choosing to remain private.
In the 1990s, the stock market was dominated by manufacturing firms that utilized public capital to expand their tangible assets. Today, many companies focus on intangible assets like software and intellectual property, which are harder to value and protect under public disclosure requirements. Generally accepted accounting principles (GAAP) classify most investments in intangible assets as expenses, which distorts a company's true value. Younger firms often find it challenging to showcase their worth under these accounting standards, making them less likely to pursue public listings. As a result, younger firms are increasingly turning to private funding or acquisition opportunities that more accurately reflect its economic potential.
There are now roughly five times as many private equity-backed firms as publicly held companies. By remaining private, firms can prioritize long-term goals without the pressure of short-term earnings expectations from public shareholders, fostering innovation and investment. The number of private equity firms has surged from 1,900 to 11,200 over the past two decades, creating a robust private funding ecosystem. Additionally, private equity investments have consistently outperformed other asset classes over the last twenty-five years, enabling companies to scale operations without depending on public markets.
Source: FS Investments
Additionally, IPOs have become increasingly costly for firms due to significant expenses related to accounting, legal, underwriting, and other services. For smaller companies (under $1 billion in revenue), these costs can be substantial, leading them to seek alternative capital-raising avenues. The smaller the company, the greater the proportion of IPO costs relative to their revenue and overall value.
Source: “Considering an IPO to fuel your company’s future?” A publication from PwC Deals
A key regulatory change benefiting private companies was the 2016 increase of the "Investor Limit" from 500 to 2,000 under the Jumpstart Our Business Startups Act (JOBS). Previously, companies with over $10 million in assets and 500 investors were subject to SEC reporting requirements akin to those of public firms, discouraging private funding. By raising the limit to 2,000, private companies gained easier access to capital while avoiding costly compliance burdens, further incentivizing them to stay private and contributing to the decline in public company listings.
M&A and Market Consolidation
Mergers and acquisitions (M&A) have played a substantial role in reducing the number of publicly traded companies in the United States, accounting for over 50% of delistings. Major corporations, such as Google, Microsoft, Apple, Meta, Amazon, and Nvidia, have collectively acquired 875 companies. Notable examples include YouTube, LinkedIn, Whole Foods, Beats Electronic and Skype, all of which would have likely pursued IPOs had they not been acquired. This trend underscores how M&A activity has reshaped the public market landscape.
Source: Crunchbase
While M&A frequently involves public companies acquiring other public firms, thereby preserving their presence in the market, it often leads to increased industry consolidation. A clear example of this is the supermarket industry, where a decreasing number of companies have steadily expanded their market share over time.
Source: U.S. Department of Agriculture
This reduced competition can drive up prices, stifle innovation, and limit consumer choices. The growing concentration of corporate power, especially among dominant tech firms, raises concerns about anti-competitive practices. As fewer, larger corporations dominate the market—whether public or private—the potential for reduced competition increases. Additionally, M&A-driven delistings contribute to the broader decline in public company listings, limiting investment opportunities for public market investors and reducing access to high-growth firms.
Navigating the Future of Public Markets
The decline in the number of public companies presents competing interests within the economy. A free market with minimal regulation encourages companies, management, and shareholders to act autonomously, in line with the invisible hand theory, which suggests that individual self-interest in production and consumption can ultimately benefit society. However, this approach raises significant concerns about reduced competition, stifled innovation, and diminished consumer choice, underscoring the need for thoughtful regulation to ensure a fair and thriving market.
Public markets embody a core American value by providing access for individuals from diverse backgrounds to invest and participate in economic growth. They foster opportunities for wealth-building that extend beyond a select few, promoting shared prosperity. Diminishing the role of public markets undermines a fundamental aspect of our economic system, limiting broad access to wealth creation and financial participation for all. However, it would be misleading to simply perceive the decline in the number of public companies solely as a disadvantage for Americans. Retirement plans that track the S&P 500 have experienced gains due to the increased profitability of the remaining public firms.
As we consider future legislation and corporate interests, it is essential to incorporate these ideas into the formulation of corporate and securities regulations. The enactment of measures like the JOBS Act and the Sarbanes-Oxley Act demonstrates a recognition of the need for incentives and regulations to adapt to changing market dynamics. The pivotal questions moving forward will be: What are the overarching goals of the economy? What are the implications of ongoing consolidation? How are everyday individuals affected by private companies opting to remain private? Addressing these questions will be crucial for fostering a balanced and inclusive economic landscape.
*The views expressed in this article do not represent the views of Santa Clara University.
Comments