Half the Firms, Twice the Profits: Public Firms' Transformation, 1996-2022

Authors: Mark J. Roe, Charles C.Y. Wang

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-regulation of the stock market. The central legal explanation is that the heavy burden of 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. Private firms are displacing public ones. 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 has held steady by every other measure for the past quarter-century and, for several central qualities, has become much bigger: profits are up greatly over the past three decades, the market value of the public sector is also up greatly, and its revenue, investment, and employment are all steady. Profits and stock market capitalization have grown faster than the economy, while revenues and investment have kept up with the economy’s growth. We emphasize that public firm profits have doubled by most measures and now make up more than 6% of the country’s GDP. This doubling has not been stressed in prior work looking at the declining number of public firms and this doubling has implications about what really is happening in the public firm sector, which we consider next.

The second challenge we pose is whether the explanation for the changing configuration of the public firm sector lies primarily in corporate and securities law’s burdens. 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—and their academic correlates—bring forward industrial organization and antitrust 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 largely tie to industrial organization via changes in the efficient scope and size of the firm (according to much academic analysis) or changes in antitrust enforcement (according to common progressive political views). In a single article, this explanatory effort can only be exploratory. We build a baseline: There are fewer firms, but the firms are much more profitable, bigger, 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 plausibly not even the most important one. Corporate policymakers should adjust appropriately.