There were 4,819 public US companies in 1975. Forty years on, that number has fallen by more than a fifth, hitting 3,766 in 2015. This peculiar dwindling is but one of the dramatic changes in US public corporations described in a new study published in the Journal of Economic Perspectives.
How else, then, have they evolved? Increasingly, it seems, through survival of the biggest. Not only are there fewer public companies; those that remain are older—and dominated by an ever-shrinking number of ever-growing behemoths.
As you can see, slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did. Zoom out a little and the trend is even more astonishing. The top 200 companies by earnings raked in more than all listed firms, combined. Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative.
And it’s not just profit; this concentration of corporate wealth shows up in a slew of other metrics.
Why has this happened? The authors, Kathleen Kahle and Rene Stulz, sift through some possibilities. It could be that consolidation reflects the market’s shifting resources to the most efficient firms—and that size aids in efficiency. But if that were the case, the number of private companies should be shrinking as well, and it hasn’t. In booming industries like services and finance, the total number of firms has risen. Instead, the big-firms-eat-the-little-ones trend among listed companies might be partly due to the loosening of antitrust enforcement, the authors note, pointing to another study.
Another factor that’s often blamed—increased regulatory burden—ignores the fact that the decline in public firms predates the big reform, the Sarbanes-Oxley Act, which took effect in the early 2000s. Plus, firms haven’t delisted so much as been absorbed by bigger listed companies. However, what could indeed be a deterrent—especially for smaller companies—is that the US Congress wields far more regulatory power over public companies than private ones, note the authors.
They point to another couple of culprits likely stymying competition. One is the rising importance of intellectual property. Research and development has become increasingly critical to competitiveness. Raising money on public markets requires transparency—and that risks revealing too much of a company’s R&D secret sauce to competitors. Meanwhile, regulatory changes and the internet have made it much easier for firms to raise funds privately.
Of course, the bigger and richer the market Goliaths get, the harder it is for the Davids of the US economy to lethally bean them—and the need for R&D to compete may have exacerbated this. Companies drowning in cash can easily afford patents and the investments to develop those. Or, as seems to be happening, to buy the company with the patent. If you can’t beat Goliath, join him.