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.

Where Have All the IPOs Gone?

Jay R. Ritter Warrington College of Business Administration

University of Florida

December 2017

Note: Operating companies only (i.e., no limited partnerships, closed-end funds, REITs, ETFs) listed on Nasdaq, NYSE, and Amex (now NYSE MKT). CRSP is the University of Chicago’s Center for Research in Security Prices. Quarter-end numbers are plotted, 1980-2016.

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Number of Domestic Companies Listed on CRSP

IPO volume has been very low in the U.S. since 2000

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In 1980-2000, an average of 310 firms went public every year

In 2001-2016, an average of 108 firms went public every year

Number of Offerings (bars) and Average First-day Returns (line) on US IPOs, 1980-2016

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U.S. IPO Volume has been particularly low for small firms Small firm IPOs are defined as IPOs with less than $60 million in LTM sales ($2016)

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Number of U.S. IPOs with pre-IPO Annual Sales less than or greater than $60m/Year ($2016)

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Doidge, Karolyi, and Stulz (2017 Journal of Financial Economics) attribute the drop in U.S. listings since the 1997 peak to 1) a drop in IPO volume, and 2) an increased rate of acquisitions by publicly traded companies. These two causes are of equal importance. Buyouts have been much less important than mergers.

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Number of Offerings (bars) and Average First-day Returns on Toronto Stock Exchange IPOs, 1980 - 2016

TSX Venture Exchange (and its predecessor, the Vancouver Stock Exchange) IPOs are not included. Fund and unit offers are not included (only operating companies are counted).

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Number of Offerings and Average First-day Returns on Japanese IPOs, 1980-2014

Source: Takashi Kaneko and others

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Number of Offerings and Average First-day Returns on Chinese IPOs, 1990-2016

(There were no IPOs in 2013, due to a CSRC moratorium)

Source: Jia, Ritter, Xie, and Zhang (2017)

What Is Driving These Trends? Jay R. Ritter

Warrington College of Business Administration

University of Florida

December 2017

Why Has IPO Volume Been So Low?

Conventional Wisdom: The IPO Market Is Broken

In the U.S., the Sarbanes-Oxley Act of 2002 (SOX) has imposed costs on publicly traded firms, especially small firms

Decimalization, Reg FD in 2000, and the Global Settlement in 2003 have led to a drop in analyst coverage for small firms, lowering their P/E ratios, and the collapse of the IPO ecosystem

The Economies of Scope Hypothesis

Increased economies of scope

Increased importance of speed to market

Getting big fast is more important than in the past

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The profitability of small independent firms

has declined relative to the value created as

part of a larger organization that can quickly

implement new technology and benefit from

economies of scope

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Changes in the Product Market

Evidence The percentage of small firms that are unprofitable has increased

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Percentage of U.S. seasoned public companies with negative EPS, 1980-2015

Small firm IPOs have become less profitable

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Percentage of U.S. IPOs from the prior 3 years with negative EPS in fiscal year t

Source: Table 2, columns 2 and 4 of Gao, Ritter, and Zhu “Where Have All the IPOs Gone?”

December 2013 Journal of Financial and Quantitative Analysis, updated

Young growth firms are more likely to be

involved in an M&A transaction

Either as an acquirer or being acquired

Uptrend started in early 1990s

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IPO Exits for VC-backed Firms Have Been Limited

Source: NVCA 2016 Yearbook Figures 9 and 10 and 2016 Yearbook Figures 4.02 and 10.0

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U.S. small firm IPO returns have been disappointing

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Small firm IPOs Large firm IPOs

Mean 3-year buy-and-hold returns on IPOs (blue) and style-matched seasoned firms (red)

1980–2000 2001–2015 1980–2000 2001–2015

$60 million in inflation–adjusted pre-IPO annual sales cutoff,

returns not including first-day return and ending in Dec. 2016

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Small firm (<€30m in sales) IPO 3-year buy-and-hold returns are lower than for large firm IPOs

(returns are measured from the 22nd trading day closing market price).

Source: Ritter, Signori, and Vismara (2013) “Economies of Scope and IPO Activity in Europe”

European small firm IPOs returns have also been low

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Small firms Large firms

BHR Benchmark (FTSE EuroMID)

Conclusion

Especially for tech firms, getting big fast is more

important than it used to be

Organic growth takes too long, so trade sales

have become more popular than remaining

independent

Small publicly traded firms have not been

undervalued

Small firms have been struggling to make money

throughout the world

Conclusion

Certain countries, such as China, have many

IPOs as the country catches up