Academic journal article Journal of Applied Finance

Public Equity Markets: Special Panel Session from the 2013 FMA Annual Meeting

Academic journal article Journal of Applied Finance

Public Equity Markets: Special Panel Session from the 2013 FMA Annual Meeting

Article excerpt

Panelists: Brad Barber, Steven Kaplan, Christian Leuz, and Jay Ritter

In a separate article in this issue, the Journal of Applied Finance editors pose the question, " Are Public Equity Markets Declining in Importance?" That article presents several stylized facts that could indicate either transitory or secular declines in the extent of corporate and investor reliance on public equity markets. At the 2013 Financial Management Association Annual Meeting, the Journal of Applied Finance sponsored a panel session where four panel members shared their perspectives on this central question. Brad Barber, of the University of California Davis, is known for his research on the returns to individual investors who invest directly in public equity. Steven Kaplan, of the University of Chicago, is known for his research on the economics and growth of private equity. Christian Leuz, also of the University of Chicago, has conducted extensive research on corporate responses to the regulation of public equity markets. Jay Ritter, of the University of Florida, has studied trends and changes in initial public offering activity in the US and elsewhere.

* Richard Smith: Jay Ritter is going to be the first presenter, and let me introduce everybody as long as we're up here. I think everybody pretty much knows all of the panel members so I'm not going to take a lot of time. Steve Kaplan, Christian Leuz-both from the University of Chicago-and Brad Barber from UC Davis.

Jay Ritter: My thoughts are based partly upon my co-authored paper with Xiaohui Gao and Zhongyan Zhu, Where Have all the IPO's Gone? which is forthcoming in the December 2013 Journal of Financial and Quantitative Analysis, and my Journal of Applied Finance article "Reenergizing the IPO Market" (in this issue).

If you look at the last 33 years of IPO (initial public offering) activity in the United States-the bars in Figure R-l-we see that from 1980 to 2000, on average 310 companies per year went public. But since the tech bubble burst in 2000, the annual average is only 99, in spite of the fact that real GDP (gross domestic product) has more than doubled from the 1980s until now, in which case we might expect that the number of IPOs per year n-B n-6 0 10 57.024 154.35 TIPOe 1980s pan «/Lang (en-B)/MCID 939 »BDC BT/T43 1 T companies to sell.

Consistent with the numbers that Rick just showed, the lighter line in Figure R-4 is the number of IPOs per quarter scaled by real GDP, and what we see is fluctuations depending upon bull and bear markets. But, we also see that during the last 15 years, since 1997, IPO activity is way below what it should have been based upon the past - bull market or bear market notwithstanding

Also graphed in this figure is the Shiller Price/Eamings Ratio. If I were to graph the market-to-book ratio, it would look the same. We see that even though valuation levels are higher than they were in the 1980s, IPO activity-especially for small companies-just has disappeared. I am going to argue is that it has permanently disappeared.

The conventional wisdom is that heavy-handed regulation has resulted in the IPO market being broken; that Sarbanes-Oxley, decimalization, Regulation FD, the Global Settlement, etc., have increased the cost of being public and has encouraged companies to go private. But when you look at the data there are some companies that have gone private as independent companies, but it's actually incredibly few. Instead, it is not companies going private or staying private as independent small companies that accounts for the shift. Rather, it is small companies selling out to big companies in trade sales.

My co-authors and I argue that it's not a public market versus private market issue; it's a big company versus small company issue. Small companies are selling out, not because of any problem with the IPO market, but because getting big fast is more important than it used to be, especially for tech companies. …

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