Since 1996, the number of public companies in the United States has fallen from more than 7,000 to fewer than 3,800.1 Taken at face value, this seems to be an alarming trend.  In a new research note, we discuss what has been driving this trend. In this blog, I’d like to use two pictures to illustrate why we don’t think the trend has negative implications for investors.  If a picture is worth a thousand words, then perhaps these two pictures are worth 2,000 words.2 (And if words aren’t your thing, we’ve got a podcast on this topic.)

Picture 1 shows that the falling number of public companies is largely attributable to a drop-off in the number of micro-cap companies.

 

Picture 1

Notes: Large, mid, low, and micro are defined by CRSP. The first and second deciles are defined as large-cap; the third, fourth, and fifth are defined as mid-cap; the sixth, seventh, and eighth are defined as low-cap (i.e., small-cap); and the ninth and tenth are defined as micro-cap. Only securities that had portfolio assignments at year-end were used.

Source: Vanguard calculations, based on data from CRSP.

 

Picture 2, however, shows that micro-caps’ proportion of overall market capitalization has stayed relatively stable, at around 1.5%.

 

Picture 2

Notes: Large, mid, low, and micro are defined by CRSP. The first and second deciles are defined as large-cap; the third, fourth, and fifth are defined as mid-cap; the sixth, seventh, and eighth are defined as low-cap (i.e., small-cap); and the ninth and tenth are defined as micro-cap. Only securities that had portfolio assignments at year-end were used.

Source: Vanguard calculations, based on data from CRSP.

 

It is critical to highlight this because these smallest firms are not considered investable for most mutual funds and are not included in many indexes because of their illiquidity.

Therefore, the shrinking number of publicly listed companies consists almost entirely of those securities that would not have been invested in by active and passive funds anyway. Despite the drop in the number of publicly listed companies, the implications for investors appear to be few, if any.

I didn’t even need 2,000 words.

 

 

1 Center for Research in Security Prices.

2 This is actually a smaller word count than that of the entire research note, not including the appendix.