Declining Number Of US Listed Companies: Implications For the Stock Market

Compared to the peak period in 1996, when over 8,000 companies were listed on the stock exchange, the number of US-listed companies has significantly dwindled. According to data from the Center for Research in Security Prices (CRSP) at the University of Chicago Booth School of Business, there are now only around 3,700 listed companies, representing a decrease of over 50%.

Economists point out that the trend of decreasing listed companies has been exacerbated by the economic recession caused by the COVID-19 pandemic and subsequent issues of soaring inflation. Concerns about economic weakness and market volatility have led to a near-complete drying up of initial public offerings (IPOs), with the US IPO market shrinking by 94.8% to a 32-year low of $8 billion last year.

According to the CRSP report, the IPO slump has continued, with the total market value of newly listed stocks in the first quarter of this year being 60% lower compared to the same period last year. The technology sector, in particular, has experienced a prolonged absence of IPOs, despite the significant surge in the Nasdaq index driven by large tech stocks like Apple and Nvidia. Tech companies that ranked among the top seven largest IPOs in 2021 have seen their stock prices decline by at least 40% since going public.

The significant drop in valuations has dampened investor enthusiasm for investing in new companies, resulting in delayed IPOs as companies wait for improved market conditions. At the same time, the number of bankruptcies among US companies has reached a new high since 2010, with companies like Bed Bath & Beyond and Party City facing the fate of being delisted from the stock exchange.

The decreasing number of publicly listed companies in the US suggests a growing trend of private ownership, which allows companies to avoid public scrutiny. Publicly listed companies are subject to regulatory oversight and are required to disclose financial reports, ensuring transparency in their financials and maintaining investor confidence. With fewer listed companies, overall financial transparency and investor trust in the stock market are compromised.

The reduced number of listed companies also results in a concentration of market power among a few dominant players. For instance, just two tech stocks, Apple and Microsoft, account for approximately 15% of the S&P 500 index’s weighting.

According to economists at Wells Fargo, the number of unlisted US companies is five times greater than the number of listed companies. The average time between a tech company transitioning from private equity to an IPO has increased from four years in 1999 to 11 years in 2019, indicating a preference for private ownership. The benefits of remaining private include avoiding the regulatory burdens and costs associated with public listing, enabling companies to focus on long-term strategic plans.

Furthermore, during bear markets when stock prices are low, some private equity funds have taken advantage of the situation to acquire shares of listed companies. Over the past 25 years, the investment performance of private equity funds has consistently outperformed global stocks, fixed income, and small-cap stocks.

The declining number of listed companies in the US raises concerns about the health and diversity of the stock market. The absence of IPOs and increasing private ownership can have implications for market transparency, investor confidence, and market concentration. The coming years will reveal whether this trend continues and what steps can be taken to address its potential consequences.