Many explanations for this decline have been put forward.
Private markets now provide equity capital in larger quantities and to more mature firms, delaying the need for public equity markets, sometimes indefinitely. Moreover, emerging firms are often less capital intensive, so there is less demand meeting an increased supply of private capital.
Some pundits point to greater scrutiny of public firms by securities regulators, through the Sarbanes-Oxley and Dodd-Frank acts, and by activist investors pushing a short-term agenda. Ironically, other pundits point to lesser scrutiny of public firms, by antitrust regulators that no longer block horizontal mergers as vigilantly.
Billion-dollar ideas like Instagram, WhatsApp and Oculus Rift have reached the public markets indirectly, each having been acquired by Google or Facebook.
Finally, investors themselves mighty be to blame. Larger institutional investors who now dominate the market require a higher level of capitalization and trading volume to pique their interest.
For all of these reasons — and maybe more — there are fewer stocks listed on U.S. exchanges now than two decades ago. Is this an unfortunate development for investors who are now deprived access to the next Amazon? The common refrain in the press is yes. Steven Davidoff's prediction in the Los Angeles Times is particularly stark: "A tragedy of the new normal is that the public equity markets are fast becoming a suckers' game. Small investors never see the better investment opportunities ... As a result, our markets are no longer democratic, they are elitist ... This, in turn, will exacerbate the increasingly acute problem of economic inequality that already is chipping away at the fabric of American society."
Is this true? Would public market investors as a group have been worse off without immediate access to the initial public offerings of 1997? The surprising answer is no. This is for the simple reason that investors cannot collectively pick the Amazon winner from the haystack of losing alternatives. To illustrate this, I computed the returns to a portfolio of U.S. public firms that excludes any firm that has been listed for 10 years or less. Essentially, we consider a parallel universe where, long before the recent decline in listings, investors were unable to buy an IPO until its 10th birthday. A dollar invested this way, starting 35 years ago in 1982, would have grown to $39.33 by the end of 2016. A dollar invested in the whole universe of listed stocks would have grown by $3.49 less, to $35.84, and it would have been a slightly bumpier ride. The difference is small, because firms less than 10 years old average only 16% of total market value, but the young firms that grew to only $22.97, not the mature ones, were the suckers' game.