Listing Gaps, Merger Waves, and the Privatization of American Equity Finance

Abstract: We document that the U.S. economy has experienced over the last 25 years sharply declining numbers of listed firms, abnormally large volumes of mergers and of private equity investments, and abnormally high aggregate valuations for U.S. listed firms. We synthesize and empirically analyze these trends and their interconnections and document the recent emergence of a new model of equity finance in the United States. We show that the listing gap identified by Doidge, Karolyi, and Stulz (2017) was caused by a merger wave occurring between 1997-2001, which directly reduced the number of listed firms, and by the rise of the private equity industry, which curtailed new listings through IPOs. Our model of equity financing well explains changes in the number of listed U.S. firms before and after the 1997-2001 transition to the new equilibrium. We conclude that this new model of equity finance has yielded financial and developmental benefits for the U.S. economy, although the merger waves have increased industrial concentration and the privatization of equity finance has potentially contributed to wealth inequality. Finally, we present preliminary evidence that this new model of equity financing is emerging in other developed countries.