I've spent my professional life studying the American public corporation, but for a while I've been worried that the next generation of corporate law scholars may have to find other subjects of study. See, e.g., Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1696303
A new paper by Kathleen Kahle and René Stulz appears to confirm many of my worst fears. They've summarized the paper at the Harvard blog:
In Is the American Public Corporation in Trouble?, we examine the evolution of U.S. public corporations over the last forty years by comparing snapshots in 1975, 1995, and 2015. During this time, public firms experience striking changes. Not only are there fewer public corporations today than forty years ago, but these corporations are very different. They are older and larger. They are in different industries. Their asset structure has changed, as they have fewer physical assets and more intangible assets, which has resulted in changes in the way they finance themselves. They are less profitable, especially if they are small. Total payouts to shareholders are higher, but these payouts now often are in the form of repurchases rather than of dividends. ...
The firms that remain public are survivors. Few firms want to join their club. A small number of firms account for most of the market capitalization, most of the net income, most of the cash, and most of the payouts of public firms. At the industry level, revenues are more concentrated, so there are fewer public firms competing for customers. A large fraction of firms are unprofitable every year, especially at the end of our sample period. The increase in unprofitable firms indicates that many public firms are fragile and helps explain the high level of delists. Accounting standards do not reflect the importance of intangible assets for these firms. Such a bias may make it harder for executives to invest for the long run.
As a whole, public firms appear to lack ambition, proper incentives, or opportunities. They are returning capital to investors and hoarding cash rather than raising funds to invest more.
The complete paper is available for download here.
Addressing the high costs of being public imposed by litigation and regulation is not a complete solution, but as my paper argued, it is an essential place to start.
