What If… The Decline and Fall of the Stock The Stock Market Market Disappears? Alexander Ljungqvist New York University
The roles of the stock market + “Primary” market function: capital formation – To enable firms to raise equity capital by issuing shares to the investing public, in part by setting and policing listing standards + “Secondary” market functions: trading – To serve as a trading venue for a firm’s shares, thereby providing liquidity to the firm’s shareholders and an opportunity for diversification – To price a firm’s shares, thereby providing market feedback to the firm’s management and aid in efficient capital allocation (price discovery)
Stylized macro facts • Most U.S. firms are not stock market listed – Of the 5.7 million U.S. firms in 2010, 3,948 (=0.06%) were public • This is true even for large U.S. firms – Among firms with >500 employees, only 13.6% are public • Privately held firms account for a large part of economic activity – 2/3 of jobs, 60% of sales, 50% of investment and profits • U.S. stock market listed firms rarely raise equity – Most listed firms never do; those that do, do so every 3-5 years – Listed firms raise more equity capital from employee option exercises than from the stock market – At macro level, the stock market is a net use (not source) of capital • Stock market listings (and IPOs) have fallen out of favor in many countries – dramatically so in the U.S.
Number of listed U.S. firms 8,000 NASDAQ 1997: 7,428 7,000 AMEX (no data pre 1962) NYSE 6,000 5,000 4,000 2014: 3,773 3,000 2,000 1,000 0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Author’s calculations using CRSP data (ordinary common shares only)
Net change in listings 3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2
Listings and delistings 3,000 Delistings 2,500 New listings 2,000 1,500 1,000 500 0 -500 -1,000 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2
Mega IPOs still happen …
Mega IPOs still happen … 2. FACEBOOK IPO DATE: 5/18/12 | $ 16 BILLION
Mega IPOs still happen … 3. ALIBABA IPO DATE: 9/19/14 | $ 21.8 BILLION
… but smaller IPOs stay away Source: NASDAQ OMX, April 2013
… as do SMEs 100% 80% 60% 40% 20% 0% 1980-1989 (N=2,041) 1990-1998 (N=3,601) 1999-2000 (N=857) 2001-2014 (N=1,547) $200m ≤ sales $100m ≤ sales<$200m $ 50m ≤ sales<$100m sales<$ 50m Source: Author’s calculations using data from Jay Ritter
… and VC exits have shifted to M&A 700 600 Mergers 500 IPOs No. of exits 400 300 200 100 0 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1 1 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 Year Source: National Venture Capital Association
The “greying” of the U.S. stock market Average age of U.S. listed firms 50 45 40 46 35 years 30 25 32 20 years 15 10 5 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Heider & Ljungqvist (JFE 2015)
Is this a “first world problem”? 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 UK NYSE Euronext Nasdaq Nordic Germany Italy Russia Greece Switzerland Turkey Spain Norway Cyprus Austria 2 0 1 Slovenia 4 o r l a Hungary 2 t e 0 0 s t 3 Ireland o r e a Luxembourg r l i e s t Source: Author’s calculations using data from the World Federation of Exchanges and from national exchanges
Asia looks healthy 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 a i d n n a a I p n a a i h J i l a C a e g r t r n s o o n u K a K a A w i s d g i y n a n a a a o T i l s H a l e i a e M r h o m n 2 T p 0 o 1 a a 4 a d o n k r l g s a n n 2 t t 0 e e 0 s n e I a 3 t n o i i d r S V L e i a n r p l i e i n s p a r t S a l i l a t i h s e h P Z k w a z e a N K Source: Author’s calculations using data from the World Federation of Exchanges and from national exchanges
Causes
A shifting cost-benefit trade-off BENEFITS BENEFITS COSTS COSTS
A shifting cost-benefit trade-off BENEFITS BENEFITS COSTS COSTS
A shifting cost-benefit trade-off Increased costs? Reduced benefits? • Regulatory burdens • Less trading liquidity for small-caps – Sarbanes-Oxley – less analyst research – Dodd-Frank – less institutional interest – (various initiatives aimed at reducing regulatory burdens: • Lower risk of involuntarily JOBS Act, JOBS Act 2.0, becoming “private filer” MiFID II, EU’s “Capital • Increased competition from Markets Union”) other sources of capital and • “Onerous” governance rules trading venues – say on pay, pay ratios, – equity: crowdfunding (?), clawbacks superangels, venture capital, • “Expensive distractions” (Ed growth equity, hedge funds… Knight, NASDAQ) – debt: “business development – proxy battles with activist companies”, markets for shareholders “Mittelstand bonds” – alternative liquidity platforms
Consequences: What if … the stock market disappears?
Where are we headed? 8,000 NASDAQ 7,000 AMEX (no data pre 1962) NYSE 6,000 5,000 4,000 3,000 2,000 1,000 0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Author’s calculations using CRSP data (ordinary common shares only)
Caveat “Prediction is very difficult, especially if it's about the future.” Nils Bohr, Nobel laureate in physics
A tongue-in-cheek prediction 8,000 NASDAQ 7,000 AMEX (no data pre 1962) NYSE 6,000 5,000 4,000 3,000 2,000 1,000 0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Author’s calculations using CRSP data (ordinary common shares only)
A tongue-in-cheek prediction 8,000 NASDAQ 7,000 AMEX (no data pre 1962) NYSE 6,000 5,000 4,000 3,000 2,000 1,000 0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Author’s calculations using CRSP data (ordinary common shares only)
Caveat “Prophesy is a good line of business, but it is full of risks.” Mark Twain
Consequences • If growth companies turn their backs on the public equity markets – is that necessarily such a bad thing? – Probably bad for the exchanges • reduced revenue from listing fees • if the primary market dies, can the secondary market survive? – But innovation disrupting businesses is nothing new – What is lost to the economy? 1. Unlisted firms have a higher cost of capital, which impacts investment, innovation, growth, job creation … – but the cost-of-capital gap may be shrinking 2. “Ordinary” investors miss out on the opportunity to participate in the wealth created by growth companies – wealth inequality may widen – public support for shareholder capitalism could decline
Origins of shareholder capitalism
The Gilded Age 1870s-1900 At the dawn of the industrial age, the U.S. experienced – corporate consolidation (the “trusts”) – financial volatility (frequent “panics”) – widening income and wealth inequality – surging immigration – and class conflict
The Progressive Era 1900-1917
“War Loans raised the profile of the small investor in the political landscape: Policymakers should consider investors’ interests paramount when gauging the possible economic impact of policy proposals.” J.C. Ott (2007)
A brief moment of social democracy “At war’s end, many Americans anticipated that widespread federal bond ownership would justify greater state interventions in the economy. Neither robust securities market regulation, nationalized enterprise, nor the welfare state was understood to be fundamentally inconsistent with the ideal of a mass investment society. “The War Loans raised expectations for new institutions, laws, and policies to support and to protect citizen-investors, even in their private corporate investments.”
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