Listing Gaps, Merger Waves, and the Privatization of U.S. Equity Finance

The number of U.S. listed companies declined by almost half between 1996 and 2012, from 8,090 to 4,102, and had risen only slightly, to 4,336, by year-end 2017. However, the real market valuation of these listed companies tripled over the same period, from $10.2 trillion in 1996 to $32.1 trillion in 2017[1], implying that the average market valuation of a U.S. listed firm has increased six-fold over the past two decades. In other words, the U.S. public stock market has become populated exclusively by behemoths. Over the same period, the U.S. has experienced historically high levels of merger and acquisitions (M&A) activity and private investments of equity. We show that a new model of equity finance has emerged in the United States over the past quarter-century, which differs significantly from both late-20th century norms and the equity model observed in other advanced economies.

This new model of U.S. equity financing is characterized by four inter-related features. First, a dramatic decline in the number of publicly listed corporations—“the U.S. listing gap.”[2] Over the same period that the U.S. lost about 4,000 listings, the total number of non-U.S. listed companies grew significantly, from 26,401 in 1996 to 34,274 at year-end 2017. We empirically assess these divergent trends and determine that the U.S. should have 3,514 more publicly listed companies in 2017 as compared with what its current level of financial and economic development would suggest. Interestingly, we find that this listing gap originated exclusively between 1997 and 2001. The timing of this abnormal decline suggests that the regulatory wave of early 2000s—Regulation FD in 2000, market decimalization in 2001, Sarbanes-Oxley in 2002, and the Global Analyst Research Settlement in 2003—cannot be the primary cause of declining U.S. listings, since the opening of the listing gap pre-dates them.

The second feature of the new model of U.S. equity financing is “the privatization of equity finance”—that is, an abnormally high level of private equity investments in the form of buyouts and venture capital investment, among others. The total value of U.S. private placements of debt and equity reached $3.0 trillion in 2017, of which about $1.2 trillion was equity capital. As a means of comparison, American companies raised only $172 billion through public equity offerings in 2017. We empirically show that growth of the U.S. private equity industry has been abnormal as compared with that of any other developed economy. In particular, the U.S. private equity financing as a percentage GDP averages about 2.3 percent since 2000, while non-U..S private equity capital investment averages about 1.5 percent of GDP over the same period.

The third feature is related to the M&A market. The U.S. experienced an epic surge in mergers between 1995 and 2001, when the total value of completed M&A deals as a percentage of GDP averaged 10.1 percent, peaking at 17 percent of GDP in 2000. Since this massive spike, the U.S. M&A market has remained extremely active, averaging 6 percent of GDP during a subsequent M&A mini-boom in 2007-08. As a means of comparison, for non-U.S. countries on average the total M&A value as a percentage of GDP has only exceeded 5 percent four times since 1990, and in the year 2000 the level of M&A as a percentage of GDP was 7 percent, a full 10 percentage points lower than it was in the U.S.

Finally, the fourth feature is a U.S.-specific “aggregate stock market capitalization premium.” While the number of U.S. listed firms has dramatically declined over the past 25 years, aggregate U.S. market capitalization has recorded impressive growth since 1990, reaching levels above 140 percent of GDP in recent years. Non-U.S. countries have also experienced rising stock market capitalizations, with aggregate non-U.S. valuation rising from about $12 trillion in 1996 to $53.2 trillion at year-end 2017. This impressive growth captures the transformation of Eastern European countries and, especially, China into modern market economies, with China’s market capitalization growing from less than $600 billion in 1996 to over $8.7 trillion in 2017. However, we find that U.S. market capitalization as a percentage of GDP is significantly higher than is predicted by models taking into account countries’ macroeconomic characteristics. This suggests that global investors have assigned a capitalization premium to the U.S. listed companies relative to non-U.S. firms.

Importantly, the timing of these features suggests a meaningful connection among them. We document that the emergence of the U.S. listing gap that occurred from 1997 to 2001 was related to the simultaneous increase in the U.S. M&A activity, record volumes of private equity financing, and an abnormally high level of market capitalization in the U.S. stock markets. We find that accounting for the latter three features of U.S. equity financing could explain at least 60.3 percent of the U.S. listing gap as previously estimated.

Have the dramatic changes to American equity finance been harmful or beneficial to the U.S. economy and financial system? We argue that, from a financial perspective, they have been largely net beneficial. Record amounts of equity capital have been funneled to American industry during the past quarter-century, especially since 2010. American firms are dominant in terms of R&D expenditure and commitment to innovation. Recent studies also suggest that shifting to external equity funding for U.S. companies has  probably enhanced the value of the  companies and the equity investors.

The net welfare impact of permanently higher M&A activity is much less clear. On the one hand, it is shown that mergers create value for both bidders and targets, and that national legislation promoting mergers subsequently leads to an active venture capital market by creating an exit opportunity for investors. On the other hand, recent studies show that concentration is rising in key American industries, principally due to mergers, and that this is harmful to consumers. From a social perspective, the implications of this transition of equity financing on the U.S. employment rate seems to be relatively small. Conversely, the increased skewness in the nation-wide distribution of equity holders across consumers, the emergence of local oligopolies in several industries, and the rise of private equity investments have had a negative distributional effect, contributing to inequality in the U.S. economy.

Finally, we find that this new model of equity financing is emerging in other countries. For instance, we show that in France, Germany, and the UK, the number of listed firms peaked in the mid-2000s and has been declining since. At the same time, these economies have  increased private equity investments, market capitalization, and, to a lesser degree, M&A activity.


[1] Valuations are in 2017 U.S. dollars.

[2] The term “the U.S. listing gap” was coined by Doidge, Karolyi, and Stulz (2017).

This post comes to us from Gabriele Lattanzio, a PhD student at the University of Oklahoma; William L. Megginson, a professor at the University of Oklahoma; and Ali Sanati, a professor at American University’s Kogod School of Business. It is based on their recent article, “Listing Gaps, Merger Waves, and the New American Model of Equity Finance,” available here.

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