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The decline of public equity

The last twenty years have seen a sharp decline in the number of public firms in the U.S. as well as in a number of other Western countries. In addition, in the U.S., public firms have returned more capital to investors than they have raised from investors.

I review the evidence on the decline of public equity and discuss possible explanations for this phenomenon. I show that the decline in public equity is explained by the increase in the supply of private equity funds and by changes in the nature of firms. In particular, intangible assets have become much more important for firms. The increase in the importance of intangible assets makes it costlier for young firms to be public when the alternative is funding through private equity from investors who have specialized knowledge that enables them to better understand the business model of young firms and contribute to the development of that business model in contrast to passive public equity investors.