Are U.S. Public Corporations or U.S. Public Markets in Trouble?

Sept. 7, 2017

News
Faculty Research

While many investors are reaping the benefits of a bull market, some financial analysts are noticing a troubling trend within U.S. public markets.

Media cites include:

  • The Arizona Republic
  • Bloomberg
  • Detroit Free Press
  • Morningstar
  • USA Today
  • Yahoo! Finance

“The stock market is shrinking,” Thomas C. Moses Professor of Finance Kathleen Kahle says. “After falling by 50 percent since its peak in 1997, the number of public corporations is now smaller than four decades ago. This phenomenon is limited to the United States—other developed countries are not experiencing this decline.”

The research, published in the Journal of Economic Perspectives ("Is the US Public Corporation in Trouble?"), revealed that U.S. corporations are much larger now, and over the last 20 years, they have become much older, with the average age rising from 12.2 years in 1995 to 18.5 years today.

“Investors question the innovation of older firms,” Kahle says. “What’s troubling is that several young, thriving companies are reluctant to go public. They find it easier to get private funding and they don’t want the public scrutiny and costs that go along with being listed. Pinterest, for example, just raised $150 million from venture capital firms.”

Also of concern is that many public companies delist or exit public markets after mergers and acquisitions. Another notable finding: public corporations invest differently now as the average firm invests more in research and development than it spends on capital expenditures.

“Compared to the 1990s, the ratio of investment to assets is lower, especially for large firms. Public firms have record-high cash holdings and, in most recent years, the average firm has more cash than long-term debt,” Kahle says.

Measuring profitability by the ratio of earnings to assets, the average firm is less profitable, but that is driven by smaller firms. “Earnings of public firms have become more concentrated—the top 200 firms in profits earn as much as all public firms combined,” she says, adding that in 2015 just 30 firms out of 3,766 public companies generated half of the earnings in the U.S. By comparison, 89 companies in 1995 and 109 companies in 1975 accounted for half of the net income.

Ownership of public firms has also changed. In 1980, institutional ownership averaged 17.7 percent, while today it’s more than 50 percent.

“As a whole, public firms appear to lack ambition, proper incentives or opportunities. They are returning capital to investors and hoarding cash rather than raising funds to invest more,” Kahle says. “The innovative firms are choosing to remain private.”

The end result of this trend is an eclipse of public markets in the United States, which can have a negative long-term impact on our economy: many investors will find it difficult to invest in young, innovative companies, which will exacerbate the increasing wealth gap. Delays in IPOs also lead to a decrease in transparency and oversight, which can result in issues similar to those recently discovered at Uber.