Half the Firms, Double the Profits: Public Firms’ Transformation, 1996–2022

The number of public firms in the United States has halved since the beginning of the twenty-first century, causing consternation among corporate and securities law regulators. The dominant explanations, often advanced by Securities and Exchange Commissioners, come from over- or under-regulation of the stock market. Private firms are displacing public ones, with legal imperatives largely explaining the sharp decline in the public firm.We challenge the implications of this thinking. While the number of firms has halved, public firms’ economic weight has not halved. To the contrary, the public firm sector has held steady for the past quarter-century by every other measure we examine, growing as fast as, or faster than, the economy: Profits and stock market capitalization have grown faster than the economy, while revenues and investment have kept up with the economy’s growth.We emphasize that, at their peak, public firm profits doubled from 1996 and public firm net income rose to make up more than 6% of the country’s GDP, much more than in 1996. This rise in profit has not been stressed in prior work and has implications about what really is happening in the public firm sector. The overall picture is more one that could upset progressive critics of the large corporation than one that should worry policymakers that the public firm is fading.The second challenge we pose is whether the changing configuration of the public firm sector is primarily due to corporate and securities law’s burdens. To explain the disappearance of 3,500 of the 7,300 firms that were publicly traded in 1996, one must explain not just the disappearance of many small firms, but the disappearance of firms at, near, or larger than, the median-sized firms of 1996. For the disappearance of those larger firms, the legal explanations seem implausible while industrial organization explanations are likely to be primary. We explore real economy changes that could readily explain the reconfiguration of the American public firm sector to one that is more profitable, more valuable, and with bigger but fewer firms.Overall, we build a better baseline for thinking about the public firm sector: There are fewer firms, but the sector is more profitable and bigger, with investment, revenue, and employment growing in line with the economy’s growth since 1996, and with that growth often coming in more concentrated industries. It is stronger, not weaker.