![Page 1: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/1.jpg)
The views expressed are
the personal views of
the presenter and do
not reflect those of
the PCAOB, members of
the Board, or the
PCAOB staff.
![Page 2: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/2.jpg)
The Decline of the
Public Company Elisabeth de Fontenay
Duke University School of Law
December 7, 2017
2
![Page 3: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/3.jpg)
Changing Public Equities Characteristics of U.S. Stock Market
1976 1996 2016
Number of publicly listed companies
4,796 7,322 3,671
Average market capitalization (in 2016 USD millions)
$620 $1,683 $6,893
Average age of a listed company (years)
10.9 12.2 18.4
Average individual direct ownership
50.0% 27.2% 21.5%
Source: Credit Suisse, The Incredible Shrinking Universe of Stocks (2017)
3
![Page 4: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/4.jpg)
Explanations for the decline?
• Supply-side:
• 1) Increasing regulatory costs (e.g., Sarbanes-Oxley)
• BUT recent empirical work rejects this hypothesis…
• 2) Deregulation of private capital
• Today, private companies get the benefits of going public, without bearing any of the costs
• 3) Founder/manager preferences
• Perception of more challenging manager-investor environment in the public markets: Shareholder litigation; activism; short sellers; “short-termism,” etc.
• 4) Changes in the product market, requiring small companies to achieve scale faster (Gao, Ritter & Zhu, 2013)
4
![Page 5: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/5.jpg)
Explanations for the decline? (cont.)
• Demand-side:
• 1) Liquidity barriers for smaller public companies (decimalization, tick size, regulation of research analysts)
• 2) Mutual-fund preferences for liquidity (Bartlett et al., 2016)
• Funds have gotten larger; concentrate on larger-cap equities
• Indexing
5
![Page 6: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/6.jpg)
U.S. Securities-Law Landmarks
• Regulation:
• Securities Act of 1933; Securities Exchange Act of 1934
• 1964 amendments
• Sarbanes-Oxley (2002)
• Dodd-Frank (2010)
• …And deregulation:
• Reg. D (1982)
• Rule 144A (1990)
• 3(c)(7) of Investment Company Act of 1940 (1996)
• JOBS Act (2012)
6
![Page 7: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/7.jpg)
Costs and Benefits of Going Public
• Costs: • Regulatory costs (mandatory disclosure; proxy rules; etc.)
• Separation of ownership and control (management agency costs)
• [Shareholder litigation and shareholder activism?]
• Third-party free-riding on disclosure and trading prices
• Benefits: • Access to cheaper capital (historically)
• Liquid stock for management compensation and acquisitions
• Publicity / Reputation
• Simpler capital structure
7
![Page 8: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/8.jpg)
HISTORICALLY
• Public companies
• Access to cheap capital
• Disclosure burden
• Private companies
• Very limited access to capital
• No disclosure burden
TODAY
• Public companies
• Don’t need more equity capital
• Still bear disclosure burden
• Private companies
• Dramatically fewer restrictions on capital raising Much cheaper
• No disclosure burden
Public-Private Divide in U.S. Securities Regulation
8
![Page 9: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/9.jpg)
Explosion of Private Capital in U.S.
• Private-company financing and M&A
• PE and VC; mutual funds investing in private firms
• Increased industry concentration
• Private debt
• Secondary trading of private-company equity
• NASDAQ Private Market
• SharesPost
• Global glut of capital
• Asset-lite economy?
9
![Page 10: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/10.jpg)
The Unicorn Stampede Rank Firm Latest
Valuation
1 Uber $68 billion
2 Airbnb $30 billion
3 Palantir $20 billion
4 WeWork $20 billion
5 Meituan-Dianping $18.3 billion
6 Flipkart $15 billion
7 SpaceX $12 billion
8 Pinterest $11 billion
9 Dropbox $10 billion
10 Spotify $8.5 billion
Rank Firm Latest Valuation
11 Stemcentrx $5 billion
12 Cloudera $4.1 billion
13 Social Finance $4 billion
14 Intarcia $3.7 billion
15 Tanium $3.5 billion
16 Docusign $3 billion
17 Legendary Entertainment $3 billion
18 Moderna $3 billion
19 Oscar $2.7 billion
20 Houzz $2.3 billion
Source: Austin et al., “The Startup Stock Tracker,” WSJ, http://graphics.wsj.com/tech-startup-stocks-to-watch/ (last visited, Oct. 18, 2017)
10
![Page 11: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/11.jpg)
Convergence of public and private capital • Cost of capital
• Size of firms; number of shareholders
• Institutional ownership
11
![Page 12: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/12.jpg)
Should we be concerned about the decline in IPOs? • Growth and jobs (Weild and Kim, 2009)
• Attractiveness of U.S. capital markets
• Unequal access to investable assets
• Impact on information / price discovery
12
![Page 13: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/13.jpg)
Source: Credit Suisse, The Incredible Shrinking Universe of Stocks (2017)
13
![Page 14: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/14.jpg)
Third-Party Effects of Public-Company Disclosure • Why don’t firms voluntarily disclose the “right” amount of information?
• Management agency costs
• Managers do not want to reveal poor performance or self-dealing
• Third-party effects (externalities)
• A firm’s information is useful to competitors, other firms’ investors, regulators, and society in general, but the firm is not compensated for these uses
• Other (coordination, credibility, etc.)
14
![Page 15: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/15.jpg)
Disclosure in Private Companies
• Characteristics:
• Wide variation
• Unevenly distributed to investors
• Very rarely made public
• Exception: firm issues high-yield debt and voluntarily filing
• Contracting for information:
• Easier for debtholders than equityholders
• Rational free-riding on public-company information
15
![Page 16: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/16.jpg)
16
![Page 17: The views expressed are the personal views of the ... of Private... · •Liquid stock for management ... 3 Palantir $20 billion 4 WeWork ... Source: Austin et al., “The Startup](https://reader031.vdocuments.site/reader031/viewer/2022030504/5ab0f2457f8b9ad9788ba8d0/html5/thumbnails/17.jpg)
Potential solutions (and their drawbacks) • 1) Re-regulating private capital
• 2) Reducing the gap in disclosure obligations between public and private companies
• 3) Forcing more companies to go public based on size
• 4) Increasing other incentives to go public • Remember importance of managerial preferences
• Managers… • Like dual-class stock
• Dislike public-interested disclosures (pay ratio, conflict minerals, mine safety)
• Dislike shareholder litigation, etc.
Difficult tradeoffs…
17