The Us Has Very Few Listed Firms. Why?

Contrary to the author’s argument, what’s happened is that high quality investment firms have ‘stolen’ the market from pump and dump take-em-public firms. And that was exactly what they set out to do.

What I really like about this article is the emphasis on (a) how the stock market and the tax system evolved for capital intensive companies, and (b) we live in a world of research and development companies.

—“The US now has “abnormally few listed firms,” according to a new working paper (registration required) from the National Bureau of Economics. (The paper hasn’t been peer-reviewed.) In 1997, more than 7,500 American firms were listed publicly in the US. Nearly two decades later, in 2016, the number had dropped more than half, slipping to 3,618 firms.

The crux of the issue is that US startups are increasingly shunning stock market boards. That could have worrying implications for America’s long-term economic prospects.

In fact, going public can hurt them.

The problem is, two features of public listings—disclosure and accounting standards—make things tough on companies with more intangible assets.

US securities law requires companies to disclose their activities in detail. But startups are wary of sharing information that might benefit their competitors

A similar problem stems from US accounting standards for public listing. Known as Generally Accepted Accounting Principles, or GAAP, these typically treat spending on tangible things like new equipment as assets, which doesn’t affect the firm’s profitability. However, GAAP regards intangible assets—research staff, employee training, and brand-building, for instance—as costs that eat into the firm’s profitability. So spending that could yield wildly profitable new products looks wasteful on paper. That makes it much harder for public investors to assess a firm’s value.

Luckily for small companies with promising ideas, there’s plenty of private money sloshing around in the form of venture capital and private equity. And it’s often easier and less risky to convince a VC fund’s in-house experts of the value of your idea than to persuade many hundreds of thousands of prospective shareholders and the financial media.”—

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