The U.S. Listing Gap

University of Toronto – Rotman School of Management

Cornell University – Johnson Graduate School of Management

René M. Stulz

Ohio State University (OSU) – Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

May 1, 2015

Charles A. Dice Center Working Paper No. 2015-07

Fisher College of Business Working Paper No. 2015-03-07

Abstract:

The U.S. had 14% fewer exchange-listed firms in 2012 than in 1975. Relative to other countries, the U.S. now has abnormally few listed firms given its level of development and the quality of its institutions. We call this the “U.S. listing gap” and investigate possible explanations for it. We rule out industry changes, changes in listing requirements, and the reforms of the early 2000s as explanations for the gap. We show that the probability that a firm is listed has fallen since the listing peak in 1996 for all firm size categories though more so for smaller firms. From 1997 to the end of our sample period in 2012, the new list rate is low and the delist rate is high compared to U.S. history and to other countries. High delists account for roughly 46% of the listing gap and low new lists for 54%. The high delist rate is explained by an unusually high rate of acquisitions of publicly-listed firms compared to previous U.S. history and to other countries.

The U.S. Listing Gap – Introduction

In a famous article, Jensen (1989) wrote that “the publicly held corporation has outlived its usefulness in many sectors of the economy.” He went on to predict the eclipse of the public corporation. His view was that the conflict between owners and managers can make public corporations an inefficient form of organization. He argued that new private organizational forms promoted by private equity firms reduce this conflict and are more efficient for firms in which agency problems are severe. The evolution of listings in the U.S. is consistent with the view that public corporations are now less important. While the number of U.S. listed firms peaked in 1996, that number is now 39% lower than when Jensen wrote his article. However, this evolution is specific to the U.S. as listings in the rest of the world increased sharply over the same period. As a result, the U.S. has developed a “listing gap.” In this paper, we demonstrate the existence of the listing gap and examine potential explanations for it.

Jensen’s view stands in sharp contrast to the literature on financial development. This literature views the size of the stock market as a measure of financial development and provides evidence that greater development leads to greater economic growth (see La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1997, hereafter LLSV, and Levine, 1997). Since 1996, U.S. listings per capita have fallen. By this measure the U.S. is less financially developed now than it was in 1996, or even in 1975. In 1996, the U.S. had 30 listings per million inhabitants; by 2012, it had only 13, a 50% decline. Thus, evidence that the U.S. has a listing gap and has fewer listed firms now than anytime during the last 40 years is a source of concern as it implies lower potential economic growth. However, it may not be a concern if, as suggested by Jensen, the U.S. has evolved so that public corporations are replaced with more efficient organizational forms that lead to higher growth. Understanding why the U.S. now has a listing gap and has so many fewer listed firms is critical to uncovering whether such a deficit should be a source of concern or is just a natural evolution as the economy moves towards more efficient forms of corporate organization.

Many studies focus on legal institutions as an important factor that affects stock market development (see LLSV, 1997, and Djankov, La Porta, Lopez-de-Silanes, and Shleifer, 2008, hereafter DLLS). Countries with stronger investor protections have better developed stock markets. We show that the U.S. has a listing gap relative to other countries with similar investor protection, economic growth, and overall wealth. The listing gap arises in the late 1990s and widens over time. It is statistically significant, economically large, and robust to different measurements. We also find that the U.S. has a listing gap when compared to its own recent history and after controlling for changing capital market conditions.

The number of U.S. listings fell from 8,025 in 1996 to 4,101 in 2012, whereas non-U.S. listings increased from 30,734 to 39,427. To understand the U.S. listing gap, we focus our investigation on why the U.S. now has so few listed firms. We consider two types of explanations: composition-related and flow-related. Composition-related explanations make predictions about the evolution of the composition of the population of listed firms. We examine whether it has changed as predicted. To study flow-related explanations, we examine the evolution of net listing flows. The net listing flow is the difference between new lists and delists. For listing counts to fall, net flows have to be negative. We investigate why net flows became negative after the listing peak in 1996 and why they stayed negative from 1997 to 2012. We refer to this as the post-peak period in contrast to the pre-peak period before 1996.