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When recently asked how many companies are in the Wilshire 5000, we naturally answered, “Five thousand.” However, on looking into it further, we were surprised to learn that there are only 3,607 companies in the index, which includes all U.S.-headquartered equities with readily available prices. Moreover, this is down from 7,562 companies in the index in 1998. Meanwhile, the number of listed companies outside the United States increased to 39,400 from 30,700 in 1996. What is going on here in the U.S. stock market?
The unusually large number of mergers since 1996 is one cause of the drop-off, according to a 2015 report by the National Bureau of Economic Research*. Going private, like Dell’s $25 billion deal in 2013, which will soon take EMC with it, is another major reason. Another contributor: failing to meet listing standards. The recent surge in energy company bankruptcies will boost delistings even further.
On top of all that, fewer companies are going public. There isn’t a shortage of new companies in the economy – this number actually continues to increase. Rather, there doesn’t seem to be much incentive to go public these days. Promising young companies can get plenty of private funding, and technology-based businesses may need less capital than old-line manufacturers or bricks and mortar retailers. Furthermore, volatile stock markets and increases in shareholder and regulatory demands are driving companies away from the public market.
These trends seem likely to continue. What is less clear is their impact. Do valuations increase for the remaining public companies as the supply diminishes? Will individual investors have less access to the best new companies? What will happen when interest rates rise and close off the spigot of cheap money driving private deals? One thing is certain: The shrinking list of Wilshire companies gives readers a sure-win trivia question to ask their friends.
* The U.S. Listing Gap, NBER Working Paper 21181 by Doidge, Karolyi and Stutz, 2015.