Hunting High and Low: The Decline of the Small IPO and What to Do About It

M-RCBG Associate Working Paper No. 86

Marshall Lux and Jack Pead



Since the bursting of the dot-com bubble in 2000, the annual number of initial public offerings in the U.S. has fallen and not recovered. Since that year, the number of IPOs has averaged 135 annually, less than a third of the average in the 1990s. That decline has long been viewed as a problem that threatens American technological innovation, job creation and competitiveness. This paper surveys the by-now extensive research and debate about IPOs, particularly tackling the question of identifying the factors behind the decline. This is not a simple problem. Multiple factors appear to have played a role not just in the recent decline in IPOs, but in the surge in number and volume of IPOs that began in the early 1980s. These factors include a financial system that features greater scale and consolidation in both financial intermediaries and institutional investors; the fallout from the Eliot Spitzer-led Global Analyst Research Settlements in 2003, which left many smaller startups without research coverage; the rise of private capital, from private equity to liberalized rules on other forms of private capital offerings; a shift in institutional investing from active to passive strategies; and an increasing burden of regulation on all public companies. It’s quite clear that the locus of the problem is with smaller companies that struggle to get coverage from the sell side and that feel a disproportionate burden from regulation like Sarbanes-Oxley than larger corporations. Two broad trends dovetail here: There is more private capital to support private startups than in the past, and the challenges of management in the public arena are complex, with high levels of M&A, activist investors, enhanced regulation, personal liability for managers and directors, and the perception of a short-term perspective in a shareholder-centric governance system. We offer a number of regulatory recommendations to ease the burden. We also ask the question: Given the larger context of changing and diversifying equity and capital markets, is the decline in IPOs since the ’90s a serious issue or a reflection of more diverse equity markets that offer a multiplicity of paths forward?

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