Washington, DC – After peaking in 1996 at more than 8,000 companies, the number of domestic US-listed public companies traded on major US exchanges has declined significantly—nearly 50% by 2019. A new report conducted by Ernst & Young for the American Council for Capital Formation (ACCF) examines the impact that higher regulatory compliance costs have had on this decline over the 2000-2019 period. These reporting requirements mandated by the Securities and Exchange Commission (SEC) help investors better understand public companies by providing periodic updates of financial results, possible company risks, and other materials on company performance. However, complying with these reporting requirements can be costly and could disincentivize companies from entering the public equity market.
Public equity markets can offer multiple benefits for companies and investors. From a company perspective, public share issuance allows access to the $33.9 trillion of US listed equity market capitalization and increases liquidity in the company’s stock, allowing company founders and early-stage investors to sell their shares more easily. From an investor perspective, public equity markets facilitate wealth creation by providing more opportunities for returns on capital, and initial public offerings (IPO) in particular allow investments in potentially high-growth companies.
“The cost of doing business on US exchanges has become significantly higher in recent years due to passage of landmark regulations like Sarbanes Oxley Act and Regulation Fair Disclosure by the SEC and more regulations are on their way such as climate or human capital disclosures. ,” said ACCF Chief Economist and Executive Vice President Pinar Çebi Wilber. “It is important to understand the degree which the complexity and burden of these existing requirements have put a chilling effect on companies that are willing to go through the IPO process.”
Among the key findings in the report:
- There were at least 800 fewer US companies traded on major US exchanges at the end of 2019 because of mandatory reporting requirements. Mandatory reporting requirements – because they have a significant initial fixed cost – primarily contribute via a reduction in IPOs. Note that these companies and the related economic activity do not cease to exist, but rather remain private instead of being public.
- The median US company that would have been public – but is now, instead, private – is estimated to have 650 workers. Across the approximately 800 fewer public companies in 2019 this amounts to more than 500,000 workers.
- The median US company that would have been public – but is now, instead, private – is estimated to have nearly $300 million in revenue. Across the approximately 800 fewer public companies in 2019 this amounts to upwards of $250 billion in revenue.
- The median US company that would have been public – but is now, instead, private – is estimated to have over $750 million in market capitalization. Across the approximately 800 fewer public companies in 2019 this amounts to nearly $600 billion in market capitalization.
- More costly reporting requirements could be expected to reduce the number of public companies. This analysis estimates that a 10% increase in reporting requirement cost over the 2000-2019 period would have reduced the number of US companies traded on major exchanges further by 80 companies, with a combined 51,000 employees, $60 billion in revenue, and over $23 billion of market capitalization. These companies and the related economic activity do not cease to exist, but rather remain private instead of being public.
The ACCF shared the new report in public comments to the SEC as it reviews its proposed rule to enhance and standardize climate-related disclosures by public companies.
“As the worldwide investor community calls for increased climate-related disclosure, regulatory agencies around the world are looking for ways to respond to these calls,” said ACCF President and CEO Mark Bloomfield in the SEC public comment filing. “The task is not easy. But while responding to these calls, it is important to evaluate whether these regulations are likely to achieve their goals without harming the efficiency of the capital markets. The EY report is one piece of the puzzle that gives us a glimpse of how some of these big regulations in the last twenty years impacted the decision of companies to stay private or go public. We do not want the downward to trend to continue in the future as the public exchanges represent an important part of capital formation equation in the U.S. .”Read ACCF Report: The Declining Number of Public Companies and Mandatory Reporting Requirements
Read ACCF Comment Letter to SEC: ACCF comment: The Enhancement and Standardization of Climate-Related Disclosures for Investors