Understanding the US Listing Gap

René Stulz is Professor of Finance at Ohio State University. This post is based on an article authored by Professor Stulz; Craig Doidge, Associate Professor of Finance at the University of Toronto; and Andrew Karolyi, Professor of Finance at Cornell University.

The number of publicly-listed firms in the U.S. peaked in 1996 at 8,025. In that year, the U.S. had 30 listings per million inhabitants. By 2012, it had only 13, or 56% less. Importantly, the decrease in listings occurred in all industries and across both the NYSE and Nasdaq. In our new working paper, entitled The U.S. Listing Gap, which was recently made publicly available on SSRN, we show that this evolution is specific to the U.S. Listings in the rest of the world, in fact, increased over the same period. The U.S. has developed 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 measurement approaches. 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 study then investigates whether the decline in listings can be explained by a decrease in the total number of firms (public and private) and/or by a decrease in firm creation (startups), so that there are fewer firms eligible to be listed. If the number of listed firms remain a constant percentage of the total number of firms, listings decrease if the total number of firms falls. However, we find that the total number of firms increased. We also show that the percentage of the total number of firms that list is relatively constant until 1996 but decreases sharply thereafter. The decline in startups cannot explain the low number of listed firms since, had the relation between new lists and startups stayed the same after 1996, the U.S. would have had 9,000 more new lists from 1997 to 2012 than it actually had. Thus, the decrease in listings after 1996 appears to be due to a lower propensity of firms to be listed rather than a decrease in the number of firms available to be listed.

Many have argued that U.S. exchanges became less attractive to small firms. These arguments were most prominent in the lead-up to the passage of the U.S. JOBS Act in 2012. We find that there were many fewer firms listed in 2012 that were comparable in size to the smallest firms listed in 1996. In general, listed firms became larger, so that the entire size distribution for listed firms shifted to the right. While these results seem supportive of the hypothesis that listing became less attractive for smaller firms, our tests show that listing became less attractive for firms of all sizes. Therefore, the listing gap cannot simply be due to the fact that small firms in particular are no longer choosing to be listed and/or are delisting from the exchanges.

We also estimate the relative contribution of declining numbers of new lists and of increased numbers of delists to the overall decrease in listing counts. Each year from 1997 through 2012 the net new list rate—or, the change in the number of listings relative to the count of total listings the prior year—is negative. A negative net new list rate can result from a low new list rate, a high delist rate, or both. Historically, the delist rate was lower than the new list rate in the U.S. After 1996, we find that the new list rate was low and the delist rate was high by historical standards. We also find that the U.S. new list rate was low and the delist rate was high compared to other countries over that same period.

Deviations from historical averages of both the U.S. new list rate and the delist rate are required to explain the listing gap. Our estimates imply that missing new lists explain about 54% of the listing gap and the abnormally large number of delists explains about 46%. In other words, the low number of U.S. listings from a global perspective is not just due to too few IPOs alone. Rather, it is also due to too many delists.

Firms can delist essentially for three reasons: they are acquired (hereafter “merger delists”), they are forced to delist (“delists for cause”), or they choose to delist (“voluntary delists”). We show that changing economic conditions do not explain the high delist rate after 1996, whatever form delists took. We find that delists for cause are not higher among younger firms after the listing peak. Further, firm characteristics cannot explain the increase in delists after the peak, regardless of the type of delists.

Following the adoption of the Sarbanes-Oxley Act (SOX) in 2002, there was much concern that more firms would go private. Though the number of firms that voluntarily delisted did increase after SOX, the cumulative count of voluntary delists is far too small to explain the high number of delists. What we do find is that the U.S. had an unusually high number of merger delists after 1996. The number of mergers is puzzlingly high compared to both U.S. history and to other countries. We test for and reject the notion that the increase in merger delists is simply due to an increase in the number of firms about to be delisted for cause that were acquired instead. From 1997 to 2012, the U.S. had 8,327 delists, of which 4,957 were due to mergers. If the U.S. merger rate over that period had been the same as the average from 1975 to 1996, the U.S. would have had 1,655 fewer delists. Had the U.S. experienced this historical merger rate and had it retained the same number of delists for cause, the U.S. would have gained back almost 45% of the listings it after the listing peak in 1996.

The full paper is available for download here.

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