Why the decline in the number of listed American firms matters

LAST month Schumpeter attended an event at the New York Stock Exchange held in honour of Brian Chesky, the co-founder of Airbnb, a room-sharing website that private investors value at $31bn. Glittering tables were laid out not far from where George Washington was inaugurated in 1789. The well-heeled members of the Economic Club of New York watched as Thomas Farley, the NYSE’s president, hailed Airbnb as an exemplar of American enterprise. Mr Chesky recounted his journey from sleeping on couches in San Francisco to being a billionaire. His mum, a former social worker, looked on. Only one thing was missing. When Mr Chesky was asked if he would list Airbnb on the NYSE, he hesitated. He said there was no pressing need.

Airbnb is not alone. A big trend in American business is the collapse in the number of listed companies. There were 7,322 in 1996; today there are 3,671. It is important not to confuse this with a shrinking of the stockmarket: the value of listed firms has risen from 105% of GDP in 1996 to 136% now. But a smaller number of older, bigger firms dominate bourses. The average listed firm has a lifespan of 18 years, up from 12 years two decades ago, and is worth four times more. The number of companies doing initial public offerings (IPOs), meanwhile, has fallen from 300 a year on average in the two decades to 2000 to about 100 a year since. Many highly-valued startups, including Lyft, a ride-sharing firm, and Pinterest, a photo-sharing site, stay private for longer.

A new paper by Michael Mauboussin, who works for Credit Suisse, a bank, and teaches at Columbia Business School in New York, explains why this matters. Consider the first reason behind the slump in the number of listed firms: the IPO drought. Although the total population of companies in America has been steady, their propensity to list their shares has roughly halved. Fear of red tape is one reason (although the decline predates the Sarbanes-Oxley Act of 2002, which tightened disclosure rules and which bosses hate). Many founders also believe that private markets are better at allowing them a long-term perspective.

As for companies’ hunger for capital, many need less to spend on assets such as plant and equipment as the economy becomes more technology-intensive. Private markets, meanwhile, have become more sophisticated at supplying the funds they do require. Many big, mainstream fund managers, such as Fidelity and T. Rowe Price, are investing in unicorns, meaning private firms that are worth over $1bn, of which there are now roughly 100.

Airbnb exemplifies the trend. It is almost a decade old but unlisted. Amazon was three years old in 1997 when it floated. Airbnb has raised billions from private markets and has 26 external investors. It will make gross operating profits of $450m this year, according to a new book, “The Airbnb Story” by Leigh Gallagher, so doesn’t need piles of new cash. At its fund-raising round last autumn, employees were able to sell around $200m of shares, which does away with another reason for firms to do an IPO.

Exits from the stockmarket by established firms—the second factor behind listed firms’ shrinking ranks—are growing in number. About a third of departures are involuntary, as companies get too small to qualify for public markets or go bust. The rest are due to takeovers. Some firms get bought by private-equity funds but most get taken over by other corporations, usually listed ones. Decades of lax antitrust enforcement mean that most industries have grown more concentrated. Bosses and consultants often argue that takeovers are evidence that capitalism has become more competitive. In fact it is evidence of the opposite: that more of the economy is controlled by large firms.

Perhaps the number of listed firms will stop falling. This year several trendy companies have floated, including Snap, a social-media firm, and Canada Goose, a maker of expensive winter coats beloved of Manhattanites. If the euphoria over tech firms fades somewhat it may become harder for unicorns to raise money privately. Continued decline in the number of listed firms would be bad news. It would be a symptom of the oligopolisation of the economy, which will harm growth in the long run.

Fewer listed firms also undermines the notion of shareholder democracy. Mr Mauboussin notes that 40 years ago a pension fund could get full exposure to the economy by owning the S&P 500 index and betting on a venture-capital fund to capture returns from startups. Now a fund needs to make lots of investments in private firms and in opaque vehicles that generate fees for bankers and advisers. Ordinary Americans without connections are meanwhile unable directly to own shares in new companies that are active in the fastest-growing parts of the economy.

Unicorns don’t have to meet public-company standards on accounting and disclosure, so it is expensive to monitor them properly. Some money managers don’t bother. There has already been one blow-up among the unicorns, Theranos, a blood-testing company whose products didn’t work. And without the close scrutiny that comes with being public, other firms appear trapped in a permanent adolescence of erratic management. Uber, a transport firm that is losing money and whose boss, Travis Kalanick, is scandal-prone, is a case in point.

Time to grow up

The fact that fewer companies control the economy is a question for antitrust regulators. Whether young firms list their shares is entirely up to their owners. Some tech tycoons including Elon Musk, the boss of Tesla, an electric-car company and Jeff Bezos of Amazon have mastered the art of running public firms on long-term horizons. Mr Chesky says that Mr Bezos has pointed out to him that a company must be “robust” to survive once it is public. Achieving that might be seen as a chore. But it can also be an incentive to improve performance and corporate culture. The hope is that Mr Chesky is up to the task, and that the next time he visits the NYSE, he’ll be there to ring the bell.