Article in today’s WSJ about the shrinking number of public companies in the US and why:
My guess is that this will eventually turnaround.
Thanks David,
This raises lots of questions. What are the implications to quantitative analysis and P123? I cannot read the article but I believe in 1999 there were 7000 companies and now there are 3200? That’s a 50% drop. Does this have any measureable impact on ranking systems and stock selection? I think the lack of companies would help indexing since the supply is restricted. If interest rates rise will the private money dry up and the number of companies will start to increase? I could go on but it would be interesting to hear from others.
Mark V.
Why are the number of stocks shrinking?
Regulations.
Smaller companies have a harder time with regulations, which leads to industry consolidation.
For example, in 2006 there were about 1,200 stocks classified as GICS(BANK). Today there are 843. That’s a drop of 30%. Where did all the 357 banks go? Consolidations. Why were they bought out? Some of them failed during the financial crisis. But if you look at the chart, you will see how the numbers keep going down even in 2015 and 2016. What explains these new ones? The new regulations. Many small banks are being bought out to combine the compliance costs and save money. You don’t find too many new banks opening up. Why? Again, because of the new regulations.
Why has there been new banking regulations? Apparently, after the crisis, the theory is that more regulations make the banking system safer. I don’t know if they are safer but the banks are getting larger. Whatever happened to the theory of shrinking the banks because they got “too big to fail”?
Another example of a regulation that is shrinking the size of the stock market is Sarbanes-Oxley. It costs about $800K to $1m or more for a small company to remain public (source). That’s more than just pocket change for many small stocks. Therefore, many stocks went private to save money.
EDIT:
Sarbanes oxley mostly explains why stocks go dark and move out of the “All Fundamentals” universe and into the 'All Stocks" universe as Paul Demartino has explained below.
It is interesting to theorize about the correlation between a shrinking stock market and stock prices. I would imagine that a shrinking stock market would make stock prices go up; all else being equal. Because when demand (of money to invest) stays the same and the supply (of assets; i.e. stocks) shrinks then prices go up. It’s basic economics.
P.S. You can do the research in about ten minutes. Create a screen using the all-stocks universe. Run the backtest over the max period. See the number of stocks shrink over the years.
Not sure where your counts come from. As of today, the P123 All Fundamentals Database has 6,209 companies and there are 8.985 listed in the All Stocks database (the difference being the former’s elimination of corporate shells and other forms of garbage for which no financials are filed).
At 1/2/99, the numbers were 8,985 and 10.821 respectively, meaning the respective decreases were 29% and 17%.
A lot of decrease came from failures (the 1999 numbers were inflated by a prior wave of newly issued notarealcompany.com type stocks. there have also been a lot of mergers. And we know a lot of financials failed during and in the wake of 2008.
The pace of IPOs since 2009 has undoubtedly been impacted by the collapsing cost of debt (why issue new equity capital when its so cheap to raise debt; capital that does not require the sharing of profits), something related to the tendency of the Street to pound managers and stock prices when new equity is issued by already-pubic companies. Also, the weakening of the sell side in the early 2000s has meant there have been far fewer investment bankers looking to trump up new issuances. And, of course, there’s the public company regulation.
Hard to say how things will shake out going forward. One factor in favor of equity IPOs may be increases in interest rates, which should, in a few years, make companies less anxious to newly capitalize with debt. But trends in cost of equity will also factor in.
In any case, we have and are likely to continue to have far bigger populations to model than we need at least for the functional life spans of all current p123 members.
Just to add to the discussion on the difference between All Fundamentals and All Stocks: There are two major categories for those stocks that in All Stocks and not All Fundamentals.
The first are those companies who report under the SEC Small Company reporting requirements. The SEC does not demand that they file regularly, so you will get them in All Fundamentals for a time and then they drop out when they lose interest or the financials start looking bad or it costs too much for them to report.
The second is Level I ADRs. We don’t get financials for them because they are traded OTC and are not required to report separately to the SEC. The fundamentals for them, generally reported for a foreign exchange, are not part of our data package (and are usually in another currency, even if we got them).
Most British companies report in this way. Their financials are in English, so why bother going all SEC when Americans can just grab the financials from their web site? I would object to describing Rolls Royce as a garbage company. 
I think the numbers are coming from this paper:
Do a search for shrinking public companies and any article you read the numbers are comparable.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2612047
Our main sample consists of all firms on the CRSP-Compustat merged dataset over the
period of 1972-2013. We limit our analysis to firms incorporated in the U.S. that trade on major
stock exchanges (NYSE, AMEX, and NASDAQ), and have information on their ordinary
common shares traded.
Okay, I take it back.
Barry Ritholtz examined the evidence. The stock market began shrinking in 1996. This was caused by both a decrease in IPOs and an increase in mergers/acquisitions.
- Sarbanes-Oxley happened in 2002. So this law had little to do with it.
- New business formation continued at the usual rate during this period, so that wasn’t it either.
- The recent cheap debt (2008-2016) can’t be blamed for the drop in IPOs during the 1990’s either.
See this article on Bloomberg by Barry Ritholtz.