
The Stock Market Is Shrinking - rchaudhary
https://www.nytimes.com/2018/08/04/business/shrinking-stock-market.html
======
myth_buster
One of the main drivers IMHO, and not mentioned in the article, is
quantitative easing or the ZIRP.

Money is cheap and easily available (to select few) which has helped players
in private equity to borrow and spend. Consequence of this is that companies
can stay private longer as there is more capital available in private funding
rounds.

Take for example the case of Uber which has managed to raise $21.7B [0],
something that in past would have only resulted from an IPO.

[0]
[https://www.crunchbase.com/search/funding_rounds/field/organ...](https://www.crunchbase.com/search/funding_rounds/field/organizations/funding_total/uber)

_Edit_

Was off by an order of magnitude on the amount Uber raised.

~~~
portman
Quick note about secondary financings. Not targeted at you per-se as much as
the large quantity of HN comments that seem to not understand the nuance.

You can't include primary and secondary financings in the same total, because
you would be double-counting. That would be like measuring a public stock on
its total volume traded, not its market cap.

For example:

\- Investor A invests £100M into Uber for 1M shares

\- Investor B buys those 1M shares from Investor A for $400M

\- Investor C buys those 1M shares from Investor B for $500M

There has been "$1B in fundraising" but: (a) only $100M went to Uber and; (b)
the market cap of those shares is $500M

~~~
dfee
I don’t think anyone would say that there was 1B in fundraising. They’d say
there was 100MM in fundraising. The market cap of those shares is indeed price
* shares outstanding. But that’s not enterprise value either.

------
WillPostForFood
It is much easier now to invest and have access to the stock market. A few
decades ago, not only did you have to have a human broker you would call on
the phone to make a trade, the costs were vastly higher, so small trades were
much cheaper.

The problem is small companies aren’t going public because of the much larger
regulatory burden or cost, or they are being acquired before they go public,
or they are staying private longer because of access to private capital.

[https://www.businessinsider.com/historical-trading-
commissio...](https://www.businessinsider.com/historical-trading-
commissions-2014-3)

~~~
tfha
I think that's what the grandparent commenter meant. Early startups with large
growth opportunity used to be abundant on the stock market. But now the burden
is too great, so only larger companies can IPO. I even hear phases like "dump
it on the public market" \- the public market is where you go today after you
have milked most of the major opportunity out already.

~~~
dstroot
This. The public mkt used be the source of capital for companies like
Facebook. Now it’s all private until most of the growth juice is squeezed out
and now the public mkt is a liquidity event for the private investors. If/when
they want to...

~~~
nugget
Facebook is up almost 500% from its IPO price, so even the very smart private
equity and venture folks can misjudge when an opportunity has been completely
milked.

~~~
scottlu2
Another reason to go public is because the SEC forces companies with 2000
stock owners (used to be 500 pre-2012) to file public disclosure documents
similar to being public, so companies typically go public at that point. I’ve
heard that some work around this limit by issuing IOUs indexed to the stock
price.

[https://www.investopedia.com/terms/5/500-shareholder-
thresho...](https://www.investopedia.com/terms/5/500-shareholder-
threshold.asp)

~~~
woolvalley
You also can give RSUs, which don't actually become owned by the recipient
until the company is acquired or become public. No fancy IOUs required. This
IOU is denominated in stock units instead of a cash price.

------
archildress
Having worked at several public companies, one of the biggest reasons
companies don't go public... is the incredible workload and productivity loss
of _being a public company._ Audits by the Big 4 accounting firms, Quarterly
Filings, constant revenue and EPS projections.

With the rise of private equity funds, there has been a legitimate alternative
to going public. PE certainly has its own bevy of issues, but I'm not sure
it's not worthwhile...

~~~
digi_owl
Dell took the namesake company private some years back because he felt that
being public didn't allow the company to make long term plans.

~~~
nsx147
Bezos doesn’t seem to have that problem.

~~~
jacques_chester
He holds the largest shareholding by a wide margin: 3x as much as Vanguard,
the next largest, who will generally not interfere.

More to the point, people have accepted Amazon as a growth company. So long as
Wall St likes the story, the price goes up, everyone is happy.

On the other hand, AMZN is trading at ~230x earnings and ~4.6x revenue. For
comparison WMT (Walmart) is trading at ~30x and ~0.5x respectively. Amazon is
growing much faster, but there are no guarantees that it will do so forever.
To reach ratios like Walmart's it will need to take in ~$3.8Tn of revenue.

~~~
dwaltrip
Small correction: to have a ratio of 0.5x revenue with their current market
cap they would need annual revenues of $1.8T (obviously, still a very large
number).

For comparison, their revenue in 2017 was $178 billion, and in 2013 it was $74
billion.

~~~
refurb
This is a great way to think about it. Amazon is priced the same as a $1.8T
company, so the assumption is that they will grow that big.

It’s not entirely unreasonable as Walmart’s total revenue today is $0.5B.

------
11thEarlOfMar
Two things:

1: The article is cherry-picking for a headline. In 1980, there were 71 IPOs
[1]. In 1990, there were 110. In 1996, the year that this article points to,
there were 677, _the highest number since 1980_. This was the center of the
".COM" bubble when many if not most companies had no business going public. To
put a finer point on it, From 1981-1990, there were 2,153 IPOs. From
1991-2000, there were 4,361.

2: It was the backlash of A. 'shit equity' that was produced in the .com
bubble, B. two recessions, and C. _common sense_ , that led to fewer and fewer
IPOs since 2000. Just consider YC itself. How many $100+ Million companies are
in it's portfolio (25?)? How many are public (a: 1)? In the 2001-2010 decade,
due to a., b., c., there were _1009_ IPOs. Since 2011, 726.

The low number of public companies is due to market dynamics and the
sentiments of founders that have ensued since the .COM bubble. Author cherry
picked the peak IPO year.

[1]
[https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs201...](https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs2016Statistics_Mar29_2017.pdf)

~~~
mcguire
So, the number of IPOs between 2001-2010 was less than half that of 1981-1990?

~~~
11thEarlOfMar
Yes, due to the .COM bubble bursting (2001-2003) and the sub-prime mortgage
crisis (2008-2009). Take a look at page 3 in [1].

~~~
ummonk
And it's on track to be half of the 1981-1990 number again in 2011-2020?

~~~
11thEarlOfMar
Yes. Reason being that companies are waiting much longer to IPO. Take a look
at Table 12b on page 34 [1]. In the 1980s, the average number of companies
that offered an IPO with sales >$1BB was under 5%. In the 2010s, it averages
about 15%. (in 2005 $)

Still contending that this move towards quality is the legacy of .COM mania
and the ensuing Sarbanes-Oxley burden.

------
abhiminator
This trend, imo, is connected up with the deeper issue of ever-widening rift
between the (shrinking) middle class and the calcifying wealth of the upper
classes -- there isn't a lot of opportunity for folks in the middle class to
invest in quality 'fast-rising upstart' stocks (like the article talks about)
today relative to, say, a couple decades ago -- the barrier of entry has
become unbelievably steep.

One (unsurprising) solution might be to fuse decentralized technologies in to
today's stock market architecture [0]. Countries like Malta are doing that
already with technologies like the Neufund/Binance platform. [1][2]

[0]
[https://www.investopedia.com/terms/d/decentralizedmarket.asp](https://www.investopedia.com/terms/d/decentralizedmarket.asp)

[1] [https://techcrunch.com/2018/07/19/malta-paves-the-way-
for-a-...](https://techcrunch.com/2018/07/19/malta-paves-the-way-for-a-
decentralized-stock-exchange/)

[2] [https://cryptoslate.com/binance-and-neufund-to-build-
first-d...](https://cryptoslate.com/binance-and-neufund-to-build-first-
decentralized-stock-exchange/)

~~~
2trill2spill
> \-- there isn't a lot of opportunity for folks in the middle class to invest
> in quality stocks today relative to, say, a couple decades ago -- the
> barrier of entry has become unbelievably steep.

Just what barrier to investing in the stock market is there, besides for
having money to invest? It's easy to setup an IRA or 401K or just setup your
own brokerage account.

~~~
chrisco255
It's not investing in the currently public companies that's the issue...it's
all the private companies that never go public...or go public so much later
than they would have in the past that all the value has already been extracted
by VCs.

~~~
trocadero
I think what has changed is the shocking amount of money that recent start ups
are burning. Snap burns more in a year (~$1 billion) than Facebook did in it's
entire life. Uber has burned ~$10 billion during its existence. It's hard for
me to picture a company raising that amount of money on the stock market.

~~~
sgerenser
Tesla has lost several billion dollars since its IPO in 2010, and that hasn't
seemed to have slowed the stock down at all.

~~~
trocadero
Tesla only raised $270 million in their IPO. They've subsequently raised more,
but their initial a pretty far cry from the billions Snap/Uber needed.

------
GreenPlastic
Ironically, one of the core reasons for less IPOs is Sarbanes-Oxley, which was
meant to protect retail investors but instead has had the second order effect
of reducing the number of IPOs and limiting the available higher growth /
higher risk opportunities these same investors.

~~~
onetimeusename
This is very accurate. It is extremely costly for companies to have an IPO.
The regulatory burden is very high for publicly traded companies.

A history of financial laws designed to protect consumers has actually reduced
the number of investment opportunities except for ultra-rich people.

Look up the definition of 'qualified investor' from the Securities Act of
1933. It prevents people below a threshold of wealth from being able to invest
in certain things.

Similarly, based on my own experience having worked with proprietary trading
outfits in the past, the FATCA laws just caused European banks to no longer
want to do business with Americans which reduced the number of available
investment opportunities again.

~~~
bitreality
For young people especially, the investment opportunities are an absolute
bore. It makes a lot more sense to take big risks when you are young, and by
implementing the 'qualified investor' requirements, many young people will
never have a chance to invest in the exact companies which interest them the
most.

A 25 year old who loses a $10K investment in Myspace, or Digg can easily
bounce back. It's well worth the chance of investing early in a company like
Snapchat or Facebook which could give them a shot at a 10-100X return.

There's a reason so many people poured money into Bitcoin and crypto. Most of
the projects are pointless, but young people have very little interest in
earning 5-10% in stocks, since they don't have a ton of capital to invest.

------
austenallred
The obvious but unpopular solution would be to make it easier for companies to
go public.

The trade off is that Theranos would be public, but so would, for example,
Stripe and Slack.

~~~
angersock
Sarbox screwed up perhaps more than it helped.

~~~
dstroot
Yes - we punished 1,000’s of good honest companies for the deliberate misdeeds
of a few bad apples. Terrible policy.

~~~
pcwalton
Those "few bad apples" caused the worst global recession since the Depression.
Let's not minimize the circumstances that led to Sarbox.

Edit: This is wrong, see below.

~~~
rpedela
I thought SOX came out of Enron and WorldCom which didn't have much to do with
the 2008 recession?

------
yohann305
This is my personal opinion: The stock market system is obsolete and needs to
be revamped for the online world where the world's population is always on,
and connected.

I have been looking for other ways to invest than putting my money in the
stock market. Luckily today there are new ways to invest that were not
available 20 years ago. I think way too many stocks' prices are disconnected
from their actual value (or even future value). To some extent, the stock
market has become a legal gambling platform. Also the market is biased towards
the professional traders and it's not serving the average person that worked
hard for their small money and it's way too easy to loose a big chunk of your
$$$.

Also, i would have loved to see the article talk about the increase in private
investments (ie VCs and Angels) Elon Musk said it himself: he tried his
hardest to keep Tesla private but he just couldn't, he had to let go and IPO.
He swore to not make that mistake again with SpaceX (more here:
[https://www.quora.com/Why-did-Elon-Musk-make-Tesla-go-IPO-
bu...](https://www.quora.com/Why-did-Elon-Musk-make-Tesla-go-IPO-but-not-
SpaceX))

~~~
baxtr
How do you imagine smart scale investors to participate then? The rich getting
even richer by keeping all successful startups private? I don’t wanna live in
that world

~~~
yohann305
I never said i had a solution to any financial markets problems. I just
pointed out things that irritated me. Maybe someone here has a better picture
and could start Stock Market 2.0 for the digital age

~~~
ianai
The digital age allows for actual ubiquitous information. A new start at a
stock market could require public companies to operate completely in the open
- zero asymmetric information. It’s a radical idea I just had, so it’s not a
fully formed idea. But information does concentrate power and thus wealth.

------
chrisco255
This is a big problem. There are fewer promising, early-stage investments
available to retail investors than ever. More and more, private VC money
captures all the value created by promising upstarts. Buying $1000 Microsoft
stock in 1986, you'd have seen a more than 1000x return in that amount of
time. Today, tech giants like Facebook IPO at $100B market cap, leaving very
little room for big returns.

This is in part because private VC funding has matured...but also because
there's all sorts of regulations about raising money that completely exclude
non-accredited investors from early-stage investments.

No wonder the rich get richer...

~~~
nbisfuor
The only way to get big returns is secrets, just like always. Insider trading
has given way to insider investing or insider hiring, which is insidery just
like always. The problem with the stock market is that it is too easy for
people to invest in, relative to other options (private companies) where you
are still welcome to (encouraged?) to learn about secrets. So people blindly
buy indexes (past returns = future results somehow, even though by definition
people are overvaluing whatever is in the bucket) instead of finding secrets.

~~~
physguy1123
> even though by definition people are overvaluing whatever is in the bucket

By that do you mean that etfs which people might buy are overvalued compared
to the stocks which compose the etf? Or that overinvesting in the etf results
in the stocks getting overvalued?

Because as somebody that works on etf market-making, no liquid etf is trading
outside of a reasonable fair-value spread based on the underlying components,
unless you count situations where markets for the underlyings are closed so
there's no exact fair value.

------
tomglynch
The reasoning:

"■ 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."

"■ Profits are increasingly concentrated in the cluster of giants — with Apple
at the forefront — that dominate the market."

~~~
dannyw
Better reasoning: increased regulation, both in terms of legislation,
regulation, and regulatory action; plus greater concentration of wealth and
greater pool of private investments / private equity.

------
vxNsr
This article is complaining about the dearth of small companies and blames...
big companies and R&D, ignoring that the biggest issue for most companies is
the increased regulation requirements that make it uneconomical to be publicly
traded until you're so big that you need to follow most of those regulations
for internal purposes anyway.

~~~
yborg
This make no sense. The regulatory threshold under Dodd-Frank is $75M in
annual revenue. So it should be no harder now than it was 20 years ago for
smaller companies to go public. And the SEC is changing this to $100M I think,
so we should see a pop in public filings if there is some pent-up demand in
midcap companies going public but for muh paperwork.

~~~
vxNsr
It's not really just Dodd-Frank that is the cause of this, it's also the SEC
slowly tightening the screws for the last 15 years since the .com bubble.
Nobody wants another bubble but instead of trying to get at the root cause
they've just pushed it out of the public eye, now a bunch of PE investors are
gonna lose money once it pops.

------
cletus
Ugh, please. At least use the right terminology. It's not "shrinking", it's
"consolidating". It's also true that it's not only harder for smaller
companies to list (with greater compliance) but it's also less necessary. The
article mentions this. With the rise of venture capital, private equity,
crowdfunding and even ICOs there just isn't as much need for a company to
raise funds by going public.

Consolidation is also not unprecedented. Standard Oil? AT&T? The Sherman Act
[1], which established antitrust, was passed in 1890.

As for not having much visibility into what a company is doing, well that was
always true. Why do you think so much importance is placed on the reputation
of executives? I would argue that it's far easier to find out what a company
is doing today that at any previous time.

Take Apple, a now $1T company. Does anyone really not know what Apple is
doing? Really?

If you want to talk about consolidation or transparency or compliance costs of
publicly listing then sure, go ahead. Those are all topics worthy of
discussion. But "shrinking" is not only inaccurate, it's arguably clickbait.

[1]
[https://en.wikipedia.org/wiki/Sherman_Antitrust_Act](https://en.wikipedia.org/wiki/Sherman_Antitrust_Act)

~~~
mFixman
I agree without all the smugness. The stockmarket isn't shrinking (or
consolidating) because there are less American companies; it's shrinking
because it's easier for companies to receive funding while staying private.

~~~
nine_k
The latter may also be for the better. Publicly traded companies are notorious
for their being short-sighted and only caring for the next quarter results.
Maximizing profit, or at least stock price, right now is the fiduciary duty of
executives; long-term strategies are harder to implement.

(Being VC-funded has its own skewed incentives, of course, like financially
unsustainable growth.)

~~~
georgeecollins
Shortsightedness has nothing to do with regulation and everything to do with
incentives (options) and liability. Strong regulations for disclosure with
protection from liability seems like a good idea.

~~~
nine_k
Disclosure is indeed good!

Doing more for the stock to rise by the end of the current quarter, and less
to make company successful in longer term, is not so good. But this is known
to happen, is it not?

------
rossdavidh
I think the real trend here is that small, fast-growing companies "cash out"
not by having an IPO, which might get you an annoying "activist shareholder"
lawsuit in a year or two as soon as you do something they don't like, but
rather by selling to an existing, large company (Apple or Facebook or Google
or whoever). Then, in many cases, the founders of the original company go out
and start another one, using the money (and experience) they got from founding
the first one. I'd say the real issue here is the amount of headaches involved
in doing an IPO and being a publicly traded company.

------
fullshark
I remember learning of the Fama French model saying small cap companies
deliver outsized returns due to being higher risk and deciding that probably
won’t hold in a world where companies can be deemed too big to fail and
propped up by the govt. Why invest in companies that can fail when the large
cap stocks have the backing of the federal government?

Add to that the fact that promising tech startups stay private it is
irrational to invest in anything else as a public investor.

------
projektfu
It's interesting how there used to be publicly traded _apartment buildings,_
and now it's more the place the financiers go to cash out once the real money
has been made. The exchanges delist low cap and low price stocks, and the idea
of starting a company with a public offering is now considered absurd.

~~~
burlesona
Yeah I think this is key. The entire concept of what the public market is for
has changed significantly. Historically the stock market had a kickstarter
like function, which meant that there were opportunities for people to bet on
neat new ideas and recognize enormous gains - but also a lot of chances to
lose the entire value of a bad bet.

These days we have Kickstarter instead and investors get swag instead of
equity. Really good deal for getting a little project to go, but sometimes too
bad since it means willing investors can’t participate in long-term gains from
the successful business launches.

------
tramGG
1\. Increase competitive opportunity and capital at the bottom (give easier
chances for small upstarts to compete and win)

2\. Relax the barrier to entries that only allow big players to compete and
win at the top (IPO)

3\. Incentivize more people to participate by broadening investor
classification.

4\. Decrease capital gains taxes.

5\. Break up monopolies.

~~~
scarface74
_Increase competitive opportunity and capital at the bottom (give easier
chances for small upstarts to compete and win)._

How much capital would it take for “small upstarts” to effectively compete
with any of the FAANG companies? A small upstart may be able to go viral and
overtake Facebook, but the rest of the companies are much more capital
intensive.

~~~
tramGG
Providing more liquidity for people to start with, coupled with making it more
difficult for big companies to participate in anti-competitive practices,
might make for a new renaissance in growth and perhaps even produce more
middle class opportunity again.

~~~
scarface74
That didn’t answer the question. Apple and Amazon in particular are able to be
successful because they both have businesses that require a large capital
outlay up front.

~~~
tramGG
These companies were successful small businesses before they were large
businesses. They were able to compete in new industries because they had
access to capital, talent, and identified areas that were important and
aggressively maintained innovation in those areas by way of investor capital
or profits.

Why is there a need for small companies to take those large companies head-on?
Maybe slow the ability for the large companies to impede competition in
tangential areas.

------
mathattack
One big issue is debt payments are counted as an expense. So on the margin
it’s economically better for companies to have more debt. This leads to more
debt than equity for public investors and more debt fueled LBOs. This is all
fine and good until the companies get in trouble.

On the bigger picture - is investing in high growth startups a right everyone
should have? Value stocks outperform growth over the long haul.

~~~
Areading314
> One big issue is debt payments are counted as an expense

The interest portion only, not principal. This deduction was also limited
substantially in the recent tax reform. See:

[https://rsmus.com/what-we-do/services/tax/lead-tax/broad-
new...](https://rsmus.com/what-we-do/services/tax/lead-tax/broad-new-
limitation-on-business-interest-deductions.html)

~~~
mathattack
Yes - just the interest, and they can perpetually roll the principal. So the
cost of debt becomes tax deductible versus dividends.

------
qaq
Increased regulatory burden in combination with rise of significant
alternative sources for raising capital prob. played a role too.

------
RayVR
Not sure if this is addressed in original paper: The cost of regulatory
compliance has massively increased. This is not a judgement of whether those
regulations are good or bad for society, just a simple fact that regulations
increase the cost to run a business, and large corporations are better able to
distribute and manage those costs - sometimes lobbying for additional
regulations which become barriers for small companies.

~~~
forapurpose
> The cost of regulatory compliance has massively increased

Many people in this discussion repeat this claim, but what I would love is
citation of evidence. We know that regulation has been politicized, with one
party trying to eliminate regulations as much as possible. That kind of
situation leads to claims that gain currency through repetition - through
talking points - not evidence.

I'd love to see the actual research and data (from non-partisan sources, not
the AEI or Cato, for example). Particularly, we need evidence of the costs, of
their relative size compared to (when? increased since when?), and of their
impact. For example, according to the article the market was much larger and
had more small participants in the 1970s, when the U.S. government in general
(I don't know about the stock market) regulated business much more.

~~~
squaresmile
This is not evidence regarding the claim, I simply want to know more about
subject. I searched the literature and found the following paper (synopsis
below). I still need to find the full paper elsewhere but it looks like it
provides a good overview of the impact of SOX. This only concerns SOX though
and there might be other regulatory burden (although I can't recall anything
significant). Moreover, regulatory burden (if it exists) is only one of many
reasons why companies don't go public (which I believe the abundance of
private equity played the biggest role).

"SOX after Ten Years: A Multidisciplinary Review" by John C. Coates and Suraj
Srinivasan
[http://www.aaajournals.org/doi/abs/10.2308/acch-50759?code=a...](http://www.aaajournals.org/doi/abs/10.2308/acch-50759?code=aaan-
site)

> We review and assess research findings from more than 120 papers in
> accounting, finance, and law to evaluate the impact of the Sarbanes-Oxley
> Act. We describe significant developments in how the Act was implemented and
> find that despite severe criticism, the Act and institutions it created have
> survived almost intact since enactment. We report survey findings from
> informed parties that suggest that the Act has produced financial reporting
> benefits. While the direct costs of the Act were substantial and fell
> disproportionately on smaller companies, costs have fallen over time and in
> response to changes in its implementation. Research about indirect costs
> such as loss of risk taking in the U.S. is inconclusive. The evidence for
> and social welfare implications of claimed effects such as fewer IPOs or
> loss of foreign listings are unclear. Financial reporting quality appears to
> have gone up after SOX but research on causal attribution is weak. On
> balance, research on the Act's net social welfare remains inconclusive. We
> end by outlining challenges facing research in this area, and propose an
> agenda for better modeling costs and benefits of financial regulation.

~~~
forapurpose
Hey - thanks! That's what HN is great for. And I like the nuance of the report
(or the abstract) - of course reality is never simple.

------
nanis
Note[1]:

    
    
        The decrease in the number of listed firms is a recent
        phenomenon. Figure 1 shows the evolution of the number
        of listed firms since 1975.1 The number of listed firms
        follows an inverted U-shape: It increased by 54 percent
        from 1975 to the listing peak in 1997 and decreased
        strongly since then.
    

Somehow, both the NYT piece and this paper manage not to mention at all the
increase in regulations since the late 90s.

[1]:
[https://www.nber.org/reporter/2018number2/stulz.html](https://www.nber.org/reporter/2018number2/stulz.html)

------
cascom
Before reaching any conclusions I might ask:

Looks like the data set is only NYSE, AMEX, NASDAQ...

A. have those exchanges strengthened their listing criteria, making it harder
to list

B. Has the number of firms listed on alternative exchanges taken up the slack?

C. Are companies deciding to list in other jurisdictions because of inversions
or regulatory concerns

D. Looks like they exclude certain types of securities - what are the
securities excluded? ADRs, MLP, REITs, etc could also be part of the story

E. What about the semi-private 144a market? How does one factor that in?

F. How has the elmination of regional stock exchanges played a role?

------
njarboe
The summary of the Stulz's article that is the source of this article[1] left
me with a new insight into one factor why, in the current system, the
companies with the highest growth potential (tech) don't IPO early. Sommer's
article tries to leave me worrying about the decline of democracy.
Unfortunately this worry is constantly repeated and is nothing new or useful
for me.

[1][http://www.nber.org/reporter/2018number2/stulz.html](http://www.nber.org/reporter/2018number2/stulz.html)

Making Sense of the Changes

The changes in public firms likely hold the key to understanding why the
number of public firms has fallen so much. Participating in public markets is
not as beneficial for firms that invest in intangibles as it is for firms that
invest in fixed assets, especially when these firms are small and young. If a
firm builds a recognizable product and requires capital to expand its
production, it is relatively straightforward for it to explain to potential
investors how their money will be put to use. As the firm explains its needs,
it does not endanger its ownership of its assets. It is rather difficult to
steal a firm's plants. If a firm invests in intangibles, it is much more
difficult for its management to convince investors that it will make good use
of its money. If the firms give too much detail, which they could be forced to
do by disclosure laws if public, their competitors can use the information. If
they give too little detail, investors will pay little for their shares. It is
not surprising, therefore, that for such firms, participation in public
markets with their disclosure requirements is likely to be onerous. It is much
easier for such firms to provide detailed information to a handful of private
equity investors who have specialized knowledge that enables them to assess a
firm's investments in intangibles. This evolution of firms and of markets has
many implications. Many of these implications have yet to be investigated.

------
georgeecollins
There is also a factor where investors, individual and institutional, invest
more through funds and ETFs rather then individual securities. Investors in
funds sometimes get exposure to growth sectors through investment in VC funds.

A great example of this is the lack of splits. It used to be that companies
would split their stock if the price got above $100 a share or so. The idea
was you wanted an individual investor to be able to trade even lots (100
shares) of your stock. Now individual investors hold your stock through a fund
or ETF so stocks like Google, Alphabet etc. are expensive per share, but no
one cares.

------
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jmartrican
Maybe smaller companies just don't need to go public as early as before
because they are able to get funding through private investors. Also, if they
show potential, they might just us easily get bought out.

There are two ways to look at this. The article paints a negative light on
these statistics. But as a small firm, it would be nicer and less troublesome
to just get funding through private firms than having to jump through hoops of
going to the exchange. It might be more efficient.

------
somberi
To quote an oft-mentioned study:

Americans in the top 10% (approximately people over a networth of 350K per
person) own about 85% of the stock (includes pension plans, 401K, etc).

Ref:

[https://www.nytimes.com/2018/02/08/business/economy/stocks-e...](https://www.nytimes.com/2018/02/08/business/economy/stocks-
economy.html)

[http://wealthometer.org/](http://wealthometer.org/)

------
mirimir
Isn't this mainly a reflection of increasing monopolization? Even if merely as
a description of what's so?

With the various mechanisms and influences just helping to drive that?

------
ISL
One would expect that a limited number of small offerings in the public
markets would mean that a small company could offer itself slowly, at a small
premium, to main-street investors.

In addition, when the private-equity holders begin to see their returns fade,
they will begin to sell their holdings to the public markets. So long as the
markets remain at elevated P/E ratios, the markets will pay a premium for
reasonable businesses.

------
r00fus
I wonder if ratio of (#of public companies on the markets to the population)
is directly correlated with Gini coefficient.

~~~
nine_k
It may as well be anti-correlated in certain parts of the spectrum. Take a
socialist / communist government redistributing wealth and thus dis-
incentivizing most people to run anything larger than a food truck, and
nationalizing a few large key companies, like transport, mining, etc.

------
spectrum1234
This is one reason I invest more in emerging markets. I also weight my
investments more international.

------
blondie9x
I'm kind of a doubter on this. Because there are less companies does it mean
it's actually shrinking or just that the number of companies nationally in
shrinking as consolidation and buy outs are rampant. I would like to see this
as a percentage of GDP.

------
anoplus
What will prevent the mega-corps from trample democracy? Do we have to trust
the wealthiest 1% to be ethical? Or should we tax the 1% percent until it
becomes, say, 5% - "decentralized" enough to keep democracy in the safe zone?

~~~
scarface74
Between worrying about private companies trampling democracy and the
politicians themselves - gerrymandering, voter suppression, insecure voting
machines, etc., I’m much more worried about the politicians.

~~~
rectang
The two problems are one and the same. Massive disparities of wealth create
massive disparities of political power. Concentrated wealth then funds
political efforts to keep their bought-and-paid-for politicians in office.

~~~
scarface74
Consolidating of political power through gerrymandering has way more to do
with ideology.

Republicans can cater to business interests and throw a few bones at the
populists and “the moral majority”.

Democrats - especially Black politicians - also like gerrymandering because
while it dilutes the power of minorities in the overall federal government by
putting all of thier votes in one district, it keeps the politicians that are
elected by the big cities in power. (Before anyone replies about me being
racist - I’m Black.)

~~~
rectang
Regardless of ideology, our representatives are reliant on campaign
contributions. (Obama was famously friendly to Big Finance.) Especially after
Citizens United, concentrated wealth disproportionately impacts governance.

~~~
scarface74
No matter how much financial backing Obama got, he was never going to convince
people in the rural south to vote for “an America hating, secret Muslim, that
was trying to bring Sharia Law to the United States” (please note sarcasm). As
the last Presidential Election proved, not only was Trunp outspent by Clinton,
he was also outspent by his Republican primary opponents. But he won anyway.
The country is so idealogically divided, once the general election happens,
really the only thing that matters is turnout and which side is angrier.

~~~
rectang
PAC money can be spent on ground game, which feeds turnout.

I agree that there is a deep cultural canyon dividing the country right now.
However, the need for funding to keep up with the competition limits what
representatives can achieve. It is in this context that the lobbying of the
finance industry (for example, but many others) finds receptive congress
critters from both parties.

For instance, there were a handful of Senate Democrats who voted in favor of a
bill to weaken Dodd-Frank back in March.

[https://www.boston.com/news/politics/2018/03/07/elizabeth-
wa...](https://www.boston.com/news/politics/2018/03/07/elizabeth-warren-
democrats-crapo-bank-deregulation-bill)

I suspect that Obama would have preferred to do more to rein in Big Finance,
but felt he could not.

------
victor106
This is a really well written article using simple language.

One other reason for companies not willing to go public could be regulations
like Sarbanes Oaxley that increase costs and responsibility for the company. I
am all for good regulation.

------
zorano
Having spent 12 years helping to build and operate stock exchanges, one of the
first things I learned to do each morning was to determine whether anything
new was going to be traded that day. This required a unique skill of being
able to decipher the simple but cryptic daily announcements distributed by the
primary listing exchanges. Over the years, patterns began to emerge which
spawned many questions. What are ETFs and why are there so many? It was then
that I noticed that there were as many removals as there were additions but
the removals were companies and the additions were ETFs. Why is that? What did
it mean?

I joined LTSE to learn to understand these questions and many others. I
believe we can create a new stock market with listing standards designed to
let companies focus on the long term.

------
mathattack
Overall this should t be a huge surprise. What’s shrinking is the # of public
companies, not the combined market cap of public companies.

If you make it harder to be a public company (Sarbanes-Oxley) then you have
fewer of them, and the benefits to being public accrue to fewer firms. This is
an unintended consequence of a well meaning attempt to root out fraud.
(Similar to rent controls having the unintended consequence of reducing the
housing stock)

I don’t buy the “Woe into us who can’t invest in Uber and Theranos” argument.
The amount of venture backed companies waiting to go public pales in
comparison to the total market size. In addition, value stocks overpeform
growth stocks over long time horizons.

~~~
azinman2
It’s hard to imagine that Sarbanes-Oxley alone is a reason why a company
wouldn’t go public. You just throw a bit of money and time at lawyers...

~~~
mathattack
It’s one reason of many. Putting personal liability on the CFO and CEO makes
them a little more likely to stay private longer or accept a buyout. There are
other things happening too: tax favorability of debt, plenty of private money,
execs not wanting to deal with activist investors.

I don’t think the net outcome is the calamity that NY Times concludes. If
companies are still getting founded, we are in good shape. I’m more concerned
about Financial Services. Very few new banks came up post-crisis, and that’s a
sign of a calcified industry.

------
jblow
Being a publicly-traded company sucks. I wouldn’t want to take my company
public either, unless I had given up wanting to do interesting things with it,
and just wanted out.

------
polskibus
Recently apple reached 1tn val. Are the globalized giants eating the rest? Is
humanity going to be better off in the long run in oligopoly like in the
Cyberpunk dystopia?

~~~
Axsuul
Or can you say that it's inevitable due to population growth and inflation?

------
hindsightbias
Imagine if Larry Ellison had convinced Jobs on his takeover effort of Apple
and taken it private in the 90's.

------
oneplane
Maybe it's not shrinking, but just a bit cold. No need to judge.

------
gricardo99
This may be yet another paradoxic, self defeating aspect of capitalism.
Capital seeks higher investment returns, and finds private, “alternative”
investments like venture capital. This creates a positive feedback cycle where
the higher returns from private/alternative investments like venture capital
in turn lower the returns of traditional investments like the stock market,
which leads to more capital seeking higher return elsewhere, rinse and repeat.

~~~
paulddraper
I don't understand this cycle you propose.

Are you talking about a cycle of improvement/innovation?

------
douglaswlance
Consolidation before the new era of company stocks being traded as digital
assets.

------
bad_ramen_soup
How are ICOs absorbing a considerable share of this 'consolidation'?

------
rectang
It may be unfortunate, but it makes sense. Crony capitalism and faux-
deregulation don't produce enduring marketplace competition -- they bring us
back towards the state of nature: winner-take-all monopolies.

------
charmides
Time for some 21st century trustbusting.

------
paulpauper
Nowadays it's harder for companies to go public. Either they stay in the seed
stage or get bought out, unlike the 80's and 90's when it was easier to raise
enough money to go public.

~~~
jmcgough
I don't think it's harder, there's just less incentive to do so. I was shocked
when I realized that dropbox was the first and only yc company to go public.

Now it's only the giant tech companies that want big liquidity events who'll
go public. You almost never see tech startups younger than a decade old go
public.

