Kogod School of Business

Info For

Our Approach to Learning


What Fewer Public Companies Means for You

Kogod School of Business finance professor Ali Sanati discusses his latest research into the decline of public firms and why it’s important.

Private company header


Over the past two decades, the United States has witnessed a dramatic decline in how many public firms are listed on stock exchanges—the number of firms peaked at 8,090 in 1996. It’s since been reduced by half to 4,266 firms in 2019. Where did they go, and what are the potential consequences of such a colossal reduction? Kogod professor of finance Ali Sanati broaches these questions in his recently published research.

In “Dissecting the Listing Gap: Mergers, Private Equity, or Regulation?” Sanati and his coauthors pinpoint several reasons for the decline in listings. Existing research on this decline has looked at the impact of mergers and acquisitions, regulatory changes, and the growth of private equity; however, this research often looks at each of these causes independently. Sanati instead created a framework that explores how all three of these potential causes interact. Sure enough, the authors found that while mergers and acquisitions play the most significant role in the decrease in public firms, the regulation changes of the early 2000s also contributed. For instance, the Sarbanes-Oxley Act of 2002 established new auditing and transparency requirements for public companies. Still, many of its rules do not apply to private companies, meaning that some public companies could see an incentive to go private to avoid these regulations. Economic patterns and public policy often influence each other, and this research indicates that both are at play here.

Professor Sanati discussed his research with us, diving into what went into answering these questions and why it matters for the broader economy.

Kogod: What methodologies were involved in conducting this research? What challenges did you face while exploring this topic, and how were those challenges resolved?

Sanati: Our study uses empirical methods to make data-driven conclusions. We used data on the number of publicly listed companies, aggregate economic conditions, merger and acquisition activity, and private equity investments in 51 developed and developing countries worldwide. We then used this data to relate the changes in the number of listed firms to their potential underlying causes—merger activity, private investments, or stock market regulations.

Our main challenge was to estimate the counterfactual number of public firms in the US—that is, the number of firms that we would have if the underlying causes of the decline did not exist. We estimated this using a model based on data from 51 countries around the world. The model uses that data and the macroeconomic characteristics of each country to predict how many public firms it would have.

What led you to explore the decline in US public firms and the causes of that decline? What has research on this or similar topics looked like so far?

The decline in the number of publicly listed firms in the US is an important issue that could have far-reaching implications for the economy, investors, and society as a whole. It can signal a decrease in the economy's overall health—it may suggest a lack of entrepreneurial activity and a decline in innovation, which can hinder economic growth and development. It can also impact corporate governance, as public companies are subject to greater regulatory scrutiny, which can help promote transparency and accountability.

A decline in public firms can limit the ability of households to benefit from profits and growth opportunities provided by successful businesses. With fewer publicly traded companies, people have fewer options to diversify their retirement savings portfolios and achieve their long-term financial goals.”

Ali Sanati

Ali Sanati

Professor of Finance and Real Estate, Kogod School of Business

There have been multiple hypotheses about the causes of this stark decline in the number of public firms in the US. Our goal with this research was to analyze different channels in a unified framework to determine the contribution of each cause on the decline.

What are the implications of this research? What do your findings mean for the future of public versus private firms in the United States and beyond?

Our results suggest that the high level of merger and acquisition activity, which has characterized the US economy for the past three decades, has played the primary role in causing a decline in the number of public firms. In addition to helping us understand the trends, this finding has important implications for government agencies enforcing antitrust laws. Antitrust laws are enforced based primarily on the potential effects on industry competition and product market considerations. Our results suggest that industry consolidation could have other important implications—its impact on the public stock markets, for example, could affect the democratization of investment opportunities for US households.

What questions did this research open that you hope to explore in the future?

Given the critical role of mergers and acquisitions in the decline of public markets, an important follow-up question involves asking about the forces that create this high level of merger and acquisition activity, especially among young and entrepreneurial firms.