29 ms·

The Stock Market Is Shrinking

333 points by rchaudhary 8y ago

gricardo99 8y ago
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 8y ago
  I don't understand this cycle you propose. Are you talking about a cycle of improvement/innovation?
tomglynch 8y ago
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 8y ago
  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.
douglaswlance 8y ago
Consolidation before the new era of company stocks being traded as digital assets.
cletus 8y ago
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
- deleted 8y ago
  [deleted]
- mFixman 8y ago
  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 8y ago
    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 8y ago
rectang 8y ago
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.
r00fus 8y ago
I wonder if ratio of (#of public companies on the markets to the population) is directly correlated with Gini coefficient.
- nine_k 8y ago
  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.
tramGG 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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 8y ago
        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.
bad_ramen_soup 8y ago
How are ICOs absorbing a considerable share of this 'consolidation'?
qaq 8y ago
Increased regulatory burden in combination with rise of significant alternative sources for raising capital prob. played a role too.
yohann305 8y ago
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-but-not-SpaceX https://www.quora.com/Why-did-Elon-Musk-make-Tesla-go-IPO-bu...)
- baxtr 8y ago
  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 8y ago
    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 8y ago
      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.
  - 8y ago
charmides 8y ago
Time for some 21st century trustbusting.
abhiminator 8y ago
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-decentralized-stock-exchange/ https://techcrunch.com/2018/07/19/malta-paves-the-way-for-a-... [2] https://cryptoslate.com/binance-and-neufund-to-build-first-decentralized-stock-exchange/ https://cryptoslate.com/binance-and-neufund-to-build-first-d...
- 2trill2spill 8y ago
  > -- 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.
  - abhiminator 8y ago
    > besides for having money to invest That is the exact barrier of entry I'm referring to. Ballooning stock prices of well-performing stocks and shrinkage of the number of listed companies in a stock market narrow the opportunities for middle-class investors.
  - charlesdm 8y ago
    He means there are fewer stocks at an early stage in their lifecycle where you can book a 1000x return by investing well.
    - 8y ago
ISL 8y ago
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.
archildress 8y ago
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...
- 3pt14159 8y ago
  Sometimes you have no choice. There are limits on shareholder counts for private corporations in some countries, including the US. But I agree with you, it's a real problem.
  - adventured 8y ago
    That's not correct re the US. You don't have to IPO or list your company (eg on the NYSE) publicly due to shareholder count. You can remain private, you have to publish financials publicly (above 1,999 shareholders). https://www.investopedia.com/terms/5/500-shareholder-threshold.asp https://www.investopedia.com/terms/5/500-shareholder-thresho...
    - hn_throwaway_99 8y ago
      Yeah, but at that point you incur many of the costs with little of the benefit, so it works like a de facto push to IPO. Is anyone aware of any companies that have stayed in that "over shareholder threshold but still remained private" boat for any considerable length of time (i.e. greater than a year or 2)?
      - vonmoltke 8y ago
        Publix Supermarkets comes immediately to mind. There are others, if you dig through the Fortune 500. The requirements for such companies are nowhere near as onerous as those required of public companies. They need to file a 10-K and 10-Qs (as necessary), but most other filings are not required. They are also not subject to Sarbanes-Oxley or Dodd-Frank.
chrisco255 8y ago
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 8y ago
  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 8y ago
    > 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.
  - mcguire 8y ago
    The major threat to indeed investing is if the index ceases to represent its sector of the economy. As implied by this article.
- paulpauper 8y ago
fullshark 8y ago
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.
paulpauper 8y ago
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 8y ago
  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.
anoplus 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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 8y ago
        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.
        8y ago
projektfu 8y ago
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 8y ago
  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.
- pembrook 8y ago
  You can still buy publicly traded REITs with residential real estate in them. Also if you’re complaining that exchanges delist penny stocks, I fail to the see the tragedy. The microcap pink sheets are the home of scams and pump and dump schemes. When people invest in these things and lose their life savings, it creates huge social problems and a burden on the welfare system.
austenallred 8y ago
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.
- deleted 8y ago
  [deleted]
- angersock 8y ago
  Sarbox screwed up perhaps more than it helped.
  - dstroot 8y ago
    Yes - we punished 1,000’s of good honest companies for the deliberate misdeeds of a few bad apples. Terrible policy.
    - pcwalton 8y ago
      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 8y ago
        I thought SOX came out of Enron and WorldCom which didn't have much to do with the 2008 recession?
      - antidesitter 8y ago
        Sarbox was enacted in 2002.
      - tomjakubowski 8y ago
        The 2007-2008 financial crisis led to Dodd-Frank, which is much more concerned with banking practices than public investment.
    - 8y ago
georgeecollins 8y ago
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.
picsao 8y ago
The problem are hidden industry-wide monopolies by huge funds.
vxNsr 8y ago
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 8y ago
  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 8y ago
    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.
spectrum1234 8y ago
This is one reason I invest more in emerging markets. I also weight my investments more international.
deleted 8y ago
[deleted]
jmartrican 8y ago
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.
Zap911 8y ago
Not surprising given how greedy top listed companies are, gobbling up smaller ones and eating away competition, and thus, consolidating wealth.
11thEarlOfMar 8y ago
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/IPOs2016Statistics_Mar29_2017.pdf https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs201...
- mcguire 8y ago
  So, the number of IPOs between 2001-2010 was less than half that of 1981-1990?
  - 11thEarlOfMar 8y ago
    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 8y ago
      And it's on track to be half of the 1981-1990 number again in 2011-2020?
      - 11thEarlOfMar 8y ago
        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.
mathattack 8y ago
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 8y ago
  > 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-limitation-on-business-interest-deductions.html https://rsmus.com/what-we-do/services/tax/lead-tax/broad-new...
  - mathattack 8y ago
    Yes - just the interest, and they can perpetually roll the principal. So the cost of debt becomes tax deductible versus dividends.
- prostoalex 8y ago
  Also, the interest rates for quality corporate debt have been artificially depressed post-QE.
  - mathattack 8y ago
    Indeed! With a long equity runup the risk premium for Corp debt drops too.
- tormeh 8y ago
  >Value stocks outperform growth over the long haul. I've seen a paper asserting the opposite. I don't remember any names, but I don't think this is something that can just be assumed to be true.
WillPostForFood 8y ago
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-commissions-2014-3 https://www.businessinsider.com/historical-trading-commissio...
- tfha 8y ago
  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 8y ago
    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...
    - ricardonunez 8y ago
      Isn't that because there a more wealthy individuals and many of them are connected to the same network?
    - chiefalchemist 8y ago
      Just the same, pub mrkts used to be about companies and investing. Now they're just datasets to be milked and manipulated by quants, automated trading, etc. Perhaps the better conclusion of the NYT article should have been that these markets no longer carry the economic significance they once did?
RayVR 8y ago
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 8y ago
  > 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 8y ago
    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=aaan-site http://www.aaajournals.org/doi/abs/10.2308/acch-50759?code=a... > 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.
blondie9x 8y ago
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.
GreenPlastic 8y ago
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 8y ago
  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 8y ago
    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.
rossdavidh 8y ago
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.
myth_buster 8y ago
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/organizations/funding_total/uber https://www.crunchbase.com/search/funding_rounds/field/organ... _Edit_ Was off by an order of magnitude on the amount Uber raised.
- bitxbit 8y ago
  I believe zirp results in higher secondary (and as you pointed out primary) markets. The stock market in the US is shrinking because of the shift in focus toward foreign markets. Namely those with higher returns (and risks) which again is partly due to low interest rates. From investor’s perspective, however, the secondary market really doesn’t give you much now. Shareholder rights/influence have diminished over the years especially among technology companies. Facebook is a primary example of this.
- fauigerzigerk 8y ago
  I agree. This is probably also the reason for the record amount of share buybacks. Credit has become cheaper relative to equity.
  - abakker 8y ago
    Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the money to buy your own shares. If you are lucky, your reduction in dividend expense is greater than the cost of the debt. But, share buybacks are basically “return capital to shareholders”. Put another way, it is an admission by management that they expect shareholders (at a given stock price) to be able to achieve higher return on equity/capital elsewhere. When a company buys its stock back, they are also saying something about how their long term prospects look.
nanis 8y ago
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
polskibus 8y ago
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 8y ago
  Or can you say that it's inevitable due to population growth and inflation?
mathattack 8y ago
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 8y ago
  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 8y ago
    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.
hindsightbias 8y ago
Imagine if Larry Ellison had convinced Jobs on his takeover effort of Apple and taken it private in the 90's.
njarboe 8y ago
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.
victor106 8y ago
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.
deleted 8y ago
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mirimir 8y ago
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?
jblow 8y ago
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.
cascom 8y ago
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?
zorano 8y ago
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.
oneplane 8y ago
Maybe it's not shrinking, but just a bit cold. No need to judge.
somberi 8y ago
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-economy.html https://www.nytimes.com/2018/02/08/business/economy/stocks-e... http://wealthometer.org/ http://wealthometer.org/
toptenonline 8y ago
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333 points by rchaudhary 8y ago

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 8y ago
I don't understand this cycle you propose. Are you talking about a cycle of improvement/innovation?

tomglynch 8y ago

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 8y ago
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.

douglaswlance 8y ago

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

cletus 8y ago

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

deleted 8y ago
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mFixman 8y ago
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 8y ago
  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 8y ago

rectang 8y ago

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.

r00fus 8y ago

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

nine_k 8y ago
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.

tramGG 8y ago

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 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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.

bad_ramen_soup 8y ago

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

qaq 8y ago

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

yohann305 8y ago

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-but-not-SpaceX https://www.quora.com/Why-did-Elon-Musk-make-Tesla-go-IPO-bu...)

baxtr 8y ago
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 8y ago
  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 8y ago
    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.
- 8y ago

charmides 8y ago

Time for some 21st century trustbusting.

abhiminator 8y ago

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-decentralized-stock-exchange/ https://techcrunch.com/2018/07/19/malta-paves-the-way-for-a-... [2] https://cryptoslate.com/binance-and-neufund-to-build-first-decentralized-stock-exchange/ https://cryptoslate.com/binance-and-neufund-to-build-first-d...

2trill2spill 8y ago
> -- 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.
- abhiminator 8y ago
  > besides for having money to invest That is the exact barrier of entry I'm referring to. Ballooning stock prices of well-performing stocks and shrinkage of the number of listed companies in a stock market narrow the opportunities for middle-class investors.
- charlesdm 8y ago
  He means there are fewer stocks at an early stage in their lifecycle where you can book a 1000x return by investing well.
  - 8y ago

ISL 8y ago

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.

archildress 8y ago

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...

3pt14159 8y ago
Sometimes you have no choice. There are limits on shareholder counts for private corporations in some countries, including the US. But I agree with you, it's a real problem.
- adventured 8y ago
  That's not correct re the US. You don't have to IPO or list your company (eg on the NYSE) publicly due to shareholder count. You can remain private, you have to publish financials publicly (above 1,999 shareholders). https://www.investopedia.com/terms/5/500-shareholder-threshold.asp https://www.investopedia.com/terms/5/500-shareholder-thresho...
  - hn_throwaway_99 8y ago
    Yeah, but at that point you incur many of the costs with little of the benefit, so it works like a de facto push to IPO. Is anyone aware of any companies that have stayed in that "over shareholder threshold but still remained private" boat for any considerable length of time (i.e. greater than a year or 2)?
    - vonmoltke 8y ago
      Publix Supermarkets comes immediately to mind. There are others, if you dig through the Fortune 500. The requirements for such companies are nowhere near as onerous as those required of public companies. They need to file a 10-K and 10-Qs (as necessary), but most other filings are not required. They are also not subject to Sarbanes-Oxley or Dodd-Frank.

chrisco255 8y ago

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 8y ago
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 8y ago
  > 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.
- mcguire 8y ago
  The major threat to indeed investing is if the index ceases to represent its sector of the economy. As implied by this article.
paulpauper 8y ago

fullshark 8y ago

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.

paulpauper 8y ago

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 8y ago
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.

anoplus 8y ago

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 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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.
      - 8y ago

projektfu 8y ago

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 8y ago
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.
pembrook 8y ago
You can still buy publicly traded REITs with residential real estate in them. Also if you’re complaining that exchanges delist penny stocks, I fail to the see the tragedy. The microcap pink sheets are the home of scams and pump and dump schemes. When people invest in these things and lose their life savings, it creates huge social problems and a burden on the welfare system.

austenallred 8y ago

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.

deleted 8y ago
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angersock 8y ago
Sarbox screwed up perhaps more than it helped.
- dstroot 8y ago
  Yes - we punished 1,000’s of good honest companies for the deliberate misdeeds of a few bad apples. Terrible policy.
  - pcwalton 8y ago
    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 8y ago
      I thought SOX came out of Enron and WorldCom which didn't have much to do with the 2008 recession?
    - antidesitter 8y ago
      Sarbox was enacted in 2002.
    - tomjakubowski 8y ago
      The 2007-2008 financial crisis led to Dodd-Frank, which is much more concerned with banking practices than public investment.
  - 8y ago

georgeecollins 8y ago

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.

picsao 8y ago

The problem are hidden industry-wide monopolies by huge funds.

vxNsr 8y ago

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 8y ago
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 8y ago
  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.

spectrum1234 8y ago

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

deleted 8y ago

[deleted]

jmartrican 8y ago

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.

Zap911 8y ago

Not surprising given how greedy top listed companies are, gobbling up smaller ones and eating away competition, and thus, consolidating wealth.

11thEarlOfMar 8y ago

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/IPOs2016Statistics_Mar29_2017.pdf https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs201...

mcguire 8y ago
So, the number of IPOs between 2001-2010 was less than half that of 1981-1990?
- 11thEarlOfMar 8y ago
  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 8y ago
    And it's on track to be half of the 1981-1990 number again in 2011-2020?
    - 11thEarlOfMar 8y ago
      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.

mathattack 8y ago

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 8y ago
> 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-limitation-on-business-interest-deductions.html https://rsmus.com/what-we-do/services/tax/lead-tax/broad-new...
- mathattack 8y ago
  Yes - just the interest, and they can perpetually roll the principal. So the cost of debt becomes tax deductible versus dividends.
prostoalex 8y ago
Also, the interest rates for quality corporate debt have been artificially depressed post-QE.
- mathattack 8y ago
  Indeed! With a long equity runup the risk premium for Corp debt drops too.
tormeh 8y ago
>Value stocks outperform growth over the long haul. I've seen a paper asserting the opposite. I don't remember any names, but I don't think this is something that can just be assumed to be true.

WillPostForFood 8y ago

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-commissions-2014-3 https://www.businessinsider.com/historical-trading-commissio...

tfha 8y ago
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 8y ago
  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...
  - ricardonunez 8y ago
    Isn't that because there a more wealthy individuals and many of them are connected to the same network?
  - chiefalchemist 8y ago
    Just the same, pub mrkts used to be about companies and investing. Now they're just datasets to be milked and manipulated by quants, automated trading, etc. Perhaps the better conclusion of the NYT article should have been that these markets no longer carry the economic significance they once did?

RayVR 8y ago

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 8y ago
> 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 8y ago
  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=aaan-site http://www.aaajournals.org/doi/abs/10.2308/acch-50759?code=a... > 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.

blondie9x 8y ago

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.

GreenPlastic 8y ago

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 8y ago
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 8y ago
  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.

rossdavidh 8y ago

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.

myth_buster 8y ago

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/organizations/funding_total/uber https://www.crunchbase.com/search/funding_rounds/field/organ... _Edit_ Was off by an order of magnitude on the amount Uber raised.

bitxbit 8y ago
I believe zirp results in higher secondary (and as you pointed out primary) markets. The stock market in the US is shrinking because of the shift in focus toward foreign markets. Namely those with higher returns (and risks) which again is partly due to low interest rates. From investor’s perspective, however, the secondary market really doesn’t give you much now. Shareholder rights/influence have diminished over the years especially among technology companies. Facebook is a primary example of this.
fauigerzigerk 8y ago
I agree. This is probably also the reason for the record amount of share buybacks. Credit has become cheaper relative to equity.
- abakker 8y ago
  Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the money to buy your own shares. If you are lucky, your reduction in dividend expense is greater than the cost of the debt. But, share buybacks are basically “return capital to shareholders”. Put another way, it is an admission by management that they expect shareholders (at a given stock price) to be able to achieve higher return on equity/capital elsewhere. When a company buys its stock back, they are also saying something about how their long term prospects look.

nanis 8y ago

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

polskibus 8y ago

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 8y ago
Or can you say that it's inevitable due to population growth and inflation?

mathattack 8y ago

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 8y ago
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 8y ago
  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.

hindsightbias 8y ago

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

njarboe 8y ago

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.

victor106 8y ago

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.

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mirimir 8y ago

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?

jblow 8y ago

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.

cascom 8y ago

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?

zorano 8y ago

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.

oneplane 8y ago

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

somberi 8y ago

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-economy.html https://www.nytimes.com/2018/02/08/business/economy/stocks-e... http://wealthometer.org/ http://wealthometer.org/

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