"Is the US public corporation in trouble?" Kahle, Kathleen, and Rene Stulz Flashcards
How has the number of public firms developed?
The number of listed firms increases rather steadily until 1997.
After that, the number starts decreasing and a “listing gap” develops (fewer firms than expected).
By 2012, the predicted number of listed companies is more than double of the actual number.
What are the reasons for a public firm to delist?
● It no longer meets the listing requirements, which is typically due to financial distress
● It has been acquired (There is evidence that mergers are the dominant reason for delisting)
● It voluntarily delists
What are the two ways to measure the age of a firm? What are the insights about agers?
● From the date of incorporation i.e date of registering as a company (lacking in databases)
● From the date the firm went public (downward biased)
Paper finds that the aging trend is more prominent in public firms than in private firms.
Concern: There is evidence that older firms innovate less and are more rigid.
How has the value of public firms changed 1975–2014?
● Aggregate market capitalization – Overall growing trend, temporary drops in 2002 & 2008.
● Tobin’s Q – Overall increasing, peaks during dot-com bubble. Company Value/Asset Value –> Hence, the decline in value after bubble might actually be a good thing.
● Average firm market capitalization – Firms have become larger
How has the concentration of public firms changed 1975–2014?
● Firm size distribution
Distribution of firm size in 2015 is similar to 1975 — both more concentrated than 1995.
● Concentration
Concern with fewer but larger firms is that concentration within industries can increase, which could adversely affect competition (difficult to enter the market for small firms). The same is proven by Herfindahl Index: industries are on average much more concentrated now than 20 years ago, but less than 40 years ago (limitation - ignores foreign firms).
What have been the changes in public companies’ intanglible asstes, inventory holdings, cash and balance sheets?
● Intangible Assets – More important.
Lower CAPEX/Assets ratio, higher R&D/Assets ratio, overall investments decreased.
● Inventory holdings – Decreased due to on-demand services.
● Cash – Firms hold more cash, especially when many intangible assets or high R&D expenditures.
● Balance Sheets – Less informative, investments in intangible assets not recorded.
How have public firms’ profits changed?
Profitability is lower.
More companies with negative net income.
Profitability has become very concentrated.
How has the financing of public firms changed?
● Firms are less leveraged than before, as there’re less fixed assets (can be used as collateral), hard to finance R&D with debt
● Nr of debt-free firms is increasing, bank loans have become less important
● More equity-financing (Smaller firms tend to issue more equity than they buy back, whereas larger firms buy back more shares than they issue)
How has the ownership structure changed?
Rise of institutional ownership (institutional investors prefer large firms).
More firms who have an institutional investor with >10% ownership (equity block).
How has the payout policy changed?
● Dividends – U-shape curve, but decreasing trend
● Stock repurchases – Much more popular
Total payout is increasing –> inconsistent with the idea of worsening of agency problems (when managers retain too much earnings, but PVGO low)
Why has the number of listed firms been decreasing?
● Consolidation Theory (Less-efficient firms acquired by efficient firms –> less public firms –> higher concentration).
Not fully true, bc in that case the nr of private firms would be decreasing too, but only public firms decrease irl.
● Little willingness to go public, due to increased regulatory burden.
Only partly true as more firms delisted because of mergers rather than going private.
● Fraction of small public firms has dropped dramatically. Due to:
○ Don’t want to disclose projects to potential competitors
○ Markets dominated by institutional investors (they prefer large firms)
○ Developments in financial intermediation have made it easier to raise funds as a private firm (PE, VCs)
○ Economies of scale hypothesis: hard to grow on their own for small firms → better off selling themselves to large firms that can bring to market faster and make economies of scale
○ Increased concentration makes it harder for small firms to succeed on their own
○ W renting and outsourcing, it has become easier to put a new product on the market w/o hard assets. Hence, smaller capex and no need to raise large equity.
