Why has the number of publicly traded companies dropped?

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You wouldn’t know it from the surging bull market, but American stock markets have shrunk by almost half companies listed over the past 20 years. According to data from the World Bank, there are fewer American companies listed on stock exchanges today than there were in 1980. While observers sharply disagree about whether this change is for the worse, the important question is why this shrinking has occurred and what it means for the economy.

Although Donald Trump and Elon Musk have quite a few differences, they seem to agree on the reasons companies choose to go private rather than list on stock markets.

The 280-plus-character version of their argument is that publicly traded companies must meet a set of SEC disclosure requirements that private companies do not. Public companies must report their earnings and other financial data quarterly, opening the door for investors to pressure companies to reach quarterly profit goals. Elon Musk in particular argues that public investors’ quarterly profit goals inhibit long-term growth. Musk’s basic argument is that quarterly disclosures promote short-term thinking.

However, as others have pointed out, Tesla is evidence against the short-termism argument. Tesla has been publicly listed for over eight years without turning a profit in any quarter, yet Musk seems to run the company according to his own strategy. Furthermore, many tech companies like Tesla (and Amazon in its early years) appear to prioritize long-term growth over quarterly profits even after going public, so investors may in fact be more supportive of long-term thinking than Musk is saying.

As stock markets have shrunk, American tech companies—including still-private companies like Uber and Airbnb—have boomed, leading some observers to connect these two trends. They argue that individual investors who buy stocks on public markets are generally unable to determine the value of tech companies. Tech companies unsurprisingly rely on technology to bring in profit: where other companies may have factories, land, or other tangible assets, tech companies have intellectual property. According to these observers, tech companies have less to gain from a possibly-messy IPO than they do from seeking private money like venture capital.

While this may be part of the reason that fewer companies are on the market, there is more to the picture. In addition to companies’ growing incentives to draw from private money, there’s more private money available than ever before. Private equity firms, one of the largest sources of money for private companies, have significant sums of money at their disposal— there are more than a trillion dollars of private equity money. Private equity has grown because the firms can borrow at low interest rates to buy companies. However, private equity executives attribute their growth to a better business model. But is investing in private markets actually the better model, as private equity executives argue? Ultimately, stock markets are a mechanism for connecting investors’ money with investments. But do closed-door deals between startups and private equity really do a better job of allocating money than public markets? Unsurprisingly, private equity executives think so, but there’s reason to doubt them. Venture capital has made some very big mistakes, and private equity firms sometimes prioritize short-term gains over long-term growth even more than public investors do. Either way, large institutional investors and the super-wealthy are by and large the main sources private equity funds.

Investments from the middle class are noticeably missing from private companies’ funds. Even though main street investors have seen gains from a record-breaking bull market, experts suggest that the returns on private investment have been even greater than gains on public stock markets, partly because quickly-growing tech companies remain private. This gap in outcomes between middle class and super-wealthy investors may have political implications in 2018 and 2020, as it could contribute to the growing income inequality in the United States.

Policymakers are working to allow main street investors access to the private investment boom. SEC Chairman Jay Clayton said that his agency would consider relaxing the biggest barrier between main street investors and private investments: the accredited investor rule, which prevents investors from obtaining private securities unless they have a six-figure annual income or a million-dollar-plus net worth. The House also passed a bill to tailor the rule. The accredited investor rule exists to protect investors from potentially risky assets which are poorly regulated, so it’s unclear how much Congress will be able to change this while still protecting investors. The SEC will study whether the relaxation of reporting requirements (in line with President Trump’s suggestion) would lure companies back to public markets. The SEC is also working on a report about how companies reach investors. The shrinking stock market has wide-ranging implications for many of their policy priorities, including income inequality and promoting economic growth, prompting policymakers to address shrinking stock market.

To learn more about the implications of the shrinking stock market, download “Shrinking Stock Markets: Review and Outlook.”