8/31/2010 6:00 PM ET|
How the stock market is killing jobs
While economists debate whether we're headed for another Great Depression, we're already in one of another sort: a great depression in the number of stocks available on U.S. stock exchanges.
In fact, this may be one reason for the economic woes that swamp us now.
The number of stocks trading on U.S. exchanges has declined a troubling 39% over the past 15 years, while the numbers continue to rocket higher virtually everywhere else in the world.
Experts blame the revolution in the U.S. stock market since the mid-1990s. That has changed the game for the pros and brought in throngs of small investors. But it's also made the U.S. market a tougher place for young, creative companies that need capital to grow.
The moribund marketplace
This market revolution brought a host of transformational changes: online brokerage accounts, cheap trades, fast trades and a proliferation of electronic exchanges. This allowed many more everyday investors to dive into stocks.
It also opened the way for computerized high-frequency trading of millions of shares for tiny gains on each one, because trading costs are now so low. Much of the action has shifted to trading indexes instead of stocks.
All this made the stock market a far more hostile place for small companies, because the changes steamrolled an old Wall Street regime that once nurtured and supported newbies. Instead, the vast scale of rapid-fire, index-based trading favors big companies.
The result is that decidedly fewer small companies are joining the market each year through initial public offerings, or IPOs. Though the numbers are up over last year, they're not close to what we saw in the booming 1990s.
This means fewer companies can raise capital to invest and grow, and we're losing the jobs and growth they might have created.
The new market
There may be a fix: a new stock market that would cater to small companies and bring back the old ecosystem that used to support them.
This is the master plan of David Weild and Edward Kim, two small-capitalization-stock experts who work for auditing firm Grant Thornton. Weild and Kim advise small companies on how to go public. A cynic might argue they're just trying to drum up business and, to some extent, they are.
But they're also both career experts in the small-cap market. So their idea for a new but old-school stock exchange for small-cap companies may not be as wacky as it sounds. (Read their plan here; it's a .pdf file.)
As an investment banker, Weild helped bring more than 500 companies public earlier in his career at Prudential Securities. Kim once actively supported the market in small-cap stocks as a research analyst at Robertson Stephens, one of the small-cap specialist brokerage shops put out of business by the stock market revolution, and as a trader at Lehman Brothers.
The damage done
If you doubt their view that big changes in the market have created problems for our economy, consider the case:
- The number of stocks on U.S. exchanges has declined by nearly 39% since 1997, the peak year for U.S. stock listings. Adjusted for a bigger economy, listings are down 55% since 1997. And the total is down 22% since 1991, so this isn't just the result of all those dot-com companies that blew up when the tech sector crashed.
In contrast, the number of listed companies in Hong Kong, which trades many Chinese stocks, has nearly doubled since 1997. "We are the only market in the world that has a steady decline in listings since 1997," Kim says.
- The reason the U.S. has fewer listed stocks is simple: Fewer small companies are going public. The U.S. has averaged 166 IPOs a year since 2001, compared with 530 a year, on average, from 1991 to 2000. We need 360 a year just to keep even as companies disappear -- a number we haven't seen since 2000.
- Particularly troubling is the decline in very small IPOs raising just $5 million to $10 million in capital -- deals that used to be routine. "Many advisers won't do a deal under $50 million," Kim says.
- Why does this matter? Intel (INTC, news) went public in 1971, raising just $8 million and trading with a market cap of just $51 million after the IPO. Even accounting for inflation, "that is not the kind of deal that would get done today," Kim says.
Fewer companies going public hurts us all, because small companies can simply grow faster than huge companies.
As many as 22 million jobs may have been lost since 1997 because the stock market is less hospitable to small companies. Weild and Kim get at this estimate by taking the number of jobs typically created by a young company each year, then multiplying it by the number of "lost" IPOs and the number of years they would have been in business.
Of course, many entrepreneurs who might have gone public still go into business and raise capital in other ways. But those businesses might have grown a lot more had they had been able to go public and used the stock market machine to raise cash.
"We believe there is a high correlation between IPOs that didn't happen and jobs that did not get created," Kim says.
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