The Public Market Accordion
April 15, 2019
The accordion was invented in the 1820s. Back then only 28 stocks were publicly traded in the United States. The average daily trading volume was less than two hundred shares and the minimum trade size was $500, equivalent to nearly $10,000 today.
Like the bellows of an accordion, the public market expanded from a nascent one dominated by financials and railroad stocks to include consumer, materials, industrials, and energy stocks. By 1840 the number of public stocks had quadrupled, and its roster then continued to grow for another century and a half.
By the late 1990s, the number of publicly-traded U.S. stocks exceeded 7,000, fueled in part by the excitement of the dot-com boom. Since then the number of companies traded on public exchanges has been in decline. According to Jay Ritter at the University of Florida, the number of listed companies in the U.S. peaked at just over 7,600 in 1997. Just 20 years later the number had fallen to around 3,600. The Wilshire 5000, named for the 5,000 stocks it held at its launch in the 1970s, now holds just 3,559 component stocks.
Why have the US public markets shrunk? The Harvard Business Review has cited the delisting of public firms that get acquired or are taken private; a decline in the number of IPOs; and listed firms failing or going bankrupt. Moreover, inexpensive borrowing has played a role in enabling American firms to merge with, or buy, their competitors to the tune of almost $2 trillion a year. Even established firms like Sears and General Electric are proving susceptible to disruption in a world where the rates of information transfer and technological advance seem to be ever-increasing.
There is always the possibility that the number of publicly traded stocks will rise again. In 2018 about 40 tech companies, and just over 130 total companies, went public through initial public offerings (IPOs). In 2019, Lyft has already gone public with Pinterest, Uber, Zoom, Postmates, and Slack anticipated to follow. Though many are not yet profitable, the underwriters of these public listings are coaching investors to believe in the firms’ prospects for continuing growth.
Ritter’s work shows that IPOs of companies with sales under $1 billion tend to under perform their already-listed peers over their first 3 years. IPOs with sales over $1 billion have some history of outperforming other stocks of similar size and style. Venture capital backed IPOs like the current crop, however, have tended to under deliver for IPO buyers.
To overcome the market shrinkage effect of delistings, new IPOs would have to expand beyond big brand names. The current wave is well beneath levels seen in the mid 90’s which saw several hundreds of IPOs per year. 1996 alone had 677. With large sums of patient capital now available to companies before they become public, a return to the levels of the 90’s may not happen soon. Only time will tell whether the public market accordion expands again.
Cam Simonds
