The confirmation hearing last week for Jay Clayton, who has been nominated to head the Securities and Exchange Commission, focused on the continued sluggishness of the market for initial public offerings. Senators pushed the nominee to do something, anything, to revive it.
The problem is that there is no magic wand — including deregulation — that can fix the decline.
The problems were recently documented in a research note by Credit Suisse titled “The Incredible Shrinking Universe of Stocks.” The bank documented that the total number of companies listed on the United States stock market plummeted by nearly half, to 3,671 last year from 7,322 in 1996.
Companies get bought or go out of business, but new companies are not replacing them. In 1996 there were 706 initial public offerings, but in 2016 there were only 105. The downturn affects all sectors, and last year there were only 30 new private equity offerings, the “lowest level since 2009,” according to Credit Suisse.
Such shrinkage has prompted hand-wringing for over a decade. At Mr. Clayton’s hearing, at least five senators brought it up, pointing to the regulatory burdens on companies going public.
There’s only one problem with casting regulation as the villain: There’s not much evidence for it.
In 2012, Congress took a stab at fixing the regulatory issues in the Jump-Start Our Business Start-Ups Act. The changes have been well-received by entrepreneurs. Some provisions, like the one allowing for confidential review with the Securities and Exchange Commission, have been particularly popular.
But the JOBS Act has not spurred initial public offerings in any meaningful way. One study found that it may — may — have resulted in 21 more new offerings a year, but given the small numbers in the analysis, that is questionable.
Moreover, the JOBS Act has done nothing to revive the market for small companies, those with a market capitalization of under $75 million. They still number less than a handful each year.
And while fingers get pointed at regulation like Sarbanes-Oxley and Dodd-Frank, the number of initial public offerings fell off the cliff in 1996 — years before either bill was passed. So there must be something more here.
Those who have examined this issue have come up with a number of possible reasons.
The first theory is that the decline is a result of structural changes in the market ecosystem. Jay Ritter, a professor at the University of Florida, has argued that the dearth of initial public offerings has been caused by companies selling out quicker.
The Credit Suisse paper also brings up this theory, noting that mergers are the major cause for companies to be delisted from a stock exchange. It appears that this deal activity has spread to the private markets, co-opting the process of taking companies public.
For example, Cisco Systems purchased AppDynamics on the eve of its market…