Are Public Firms Disappearing? Corporate Law and Market Power Analyses

Authors:

Mark J. Roe

Harvard Law School

Charles C. Y. Wang

Harvard Business School (HBS); European Corporate Governance Institute (ECGI)

Abstract

The number of public firms in the United States has halved since the beginning of the twenty-first century, causing consternation among corporate and securities law regulators. The dominant explanations, often advanced by Securities and Exchange commissioners when considering policy initiatives, come from over- or under- corporate regulation of the stock market. The central legal explanation is that corporate and securities law has made the cost of being public too high. Conversely, goes the second legal explanation, capital-raising rules for private firms were once very strict but have loosened up. Private firms can now raise capital nearly as well as small- and medium-sized public firms. Either way, these views see legal imperatives as explaining the sharp decline in the public firm.



We challenge the implications of this thinking. While the number of firms has halved, public firms’ economic weight has not halved. To the contrary, the public firm sector is bigger by every other measure: total stock market capitalization is up greatly over the past three decades, profits are up, revenues are up, investment is up, and employment is up. Moreover, stock market capitalization, profits, revenues, and investment have not only increased but have all grown faster than the economy.



The second challenge we pose is whether the explanation for the changing configuration of the public firm sector lies primarily in legal explanations. In other policy circles—at the Federal Trade Commission or the Justice Department’s Antitrust Division, for example—policymakers ask why American industry is so much more concentrated now, with fewer firms in most industries today than there were at the end of the twentieth century. Yet these policymakers bring forward antitrust and industrial organization explanations, not corporate or securities regulation. Little crossover exists between these two policymaking circles, one focusing on corporate and securities regulation (the SEC) and the other on competition (the FTC). We bring forward real economy changes that could readily explain the reconfiguration of the American public firm sector to one that is more profitable, more valuable, and with bigger but fewer firms. These real economy developments are largely tied to industrial organization via changes in antitrust enforcement or changes in the efficient scope of the firm. In a single article, this explanatory effort can only be exploratory. Multiple researchers in multiple efforts will be needed to explain which real economy forces have an impact and which do not. We begin this effort: There are fewer firms, but the firms are bigger, more profitable and often in more concentrated industries. We show why the legal explanation is unlikely to be the complete story for the package of changes over the past quarter-century and probably not even the most important one. Corporate policymakers should adjust appropriately.