The Failed State of U.S. Corporations

There lurks a very troubling problem with U.S. public corporations: The stock markets are shrinking as the number of listed firms is decreasing! 

And it's falling FAST! Since 1997 (at its peak) the number of listed companies have declined by 50%. More striking, is that this phenomenon is only occurring in the United States - and in no other developed country. 

But WHY is this happening?

Research reveals that U.S. corporations are getting larger and older - the average age of a publicly traded company is now 18.6 years (the oldest in recorded history). The troubling fact is that young, thriving companies are reluctant to go public. They find it easier to get private funding and don't want to deal with the burdens of public scrutiny and reporting.
A good example is Pinterest, which recently raised $150 million from venture funds and bypassed the whole IPO gauntlet. To make matters worse, many companies are de-listing or exiting the public stock markets after a merger or acquisition takes place. 

It should also be noticed that public firms have become more concentrated. Last year, the top 200 firms earned more than all of the public firms combined - some 3,766 companies. Worse still, only 30 firms generated 50% of all profits reported. This compares with 89 companies in 1995 and 109 in 1975. Stock ownership in public firms has also change. In 1980, institutional ownership averaged 18%, while today it is over 50%.

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It appears that public firms have been lackluster performers. Returning capital to investors and hoarding cash rather than using and raising funds to invest and expand.

Result

If this trend continues, the end result will be very negative economically.  Shareholders will find it difficult to invest in young, innovative companies. Delays in IPOs can lead to both decreased transparency and oversight, as we recently witnessed with Uber.

The trend of the incredible shrinking stock markets is not only troubling but points to a very different future regarding how people invest in companies - and there appears to be no end in sight.

Source for some data: Kathy Kahle, Prof. of Finance, Univ. of Arizona

By: Jim Lavorato
Principal, Fund-House Ventures, LLC