Half the Firms, Double the Profits: Public Firms' Transformation, 1996-2022

Journal of Law, Finance, and Accounting, Forthcoming

European Corporate Governance Institute – Law Working Paper No. 771/2024

54 Pages Posted: 3 Mar 2023 Last revised: 17 Jul 2024

See all articles by Mark J. Roe

Mark J. Roe

Harvard Law School

Charles C. Y. Wang

Harvard University - Accounting & Control Unit; European Corporate Governance Institute (ECGI)

Date Written: May 16, 2024


The number of public firms in the United States has halved since the beginning of the twenty-first century, causing consternation among corporate and securities law regulators. The dominant explanations, often advanced by Securities and Exchange Commissioners when considering policy initiatives, come from over- or under-regulation of the stock market. The central legal explanation is that the heavy burden of corporate and securities law has made the cost of being public too high. Conversely, goes the second legal explanation, previously-strict capital raising rules for private firms have loosened up, allowing private firms to raise capital nearly as well as small- and medium-sized public firms. Private firms are displacing public ones. These two views see legal imperatives as explaining the sharp decline in the public firm.

We challenge the implications of this thinking. While the number of firms has halved, public firms’ economic weight has not halved. To the contrary, the public firm sector has held steady for the past quarter-century by every other measure we examine, growing in line with the economy, and, for several central qualities, has grown more than the economy: Profits and stock market capitalization have grown faster than the economy, while revenues and investment have kept up with the economy’s growth. We emphasize that, at their peak, public firm profits doubled from 1996 and public firm net income now makes up more than 6% of the country’s GDP, much more than in 1996. This rise in profit has not been stressed in prior work looking at the declining number of public firms. Rising profit has implications about what really is happening in the public firm sector, which we consider next.

The second challenge we pose is whether the explanation for the changing configuration of the public firm sector lies primarily in corporate and securities law’s burdens. To explain the disappearance of nearly 3,500 of the 7,300 that were publicly-traded in 1996, one must explain not just the disappearance of many small firms, but the disappearance of firms at, near, or larger than, the median-sized firms of 1996. For the disappearance of those firms towards the middle of the 1996 distribution, the legal explanations seem implausible. In other policy circles—at the Federal Trade Commission or the Justice Department’s Antitrust Division, for example—policymakers ask why American industry is so much more concentrated now, with fewer firms in most industries today than there were at the end of the twentieth century. Yet these policymakers—and their academic correlates—bring forward industrial organization and antitrust explanations, not corporate or securities regulation. Little crossover exists between these two policymaking circles or these two academic inquiries, one focusing on corporate and securities regulation (the SEC) and the other on competition (the FTC).

We bring forward real economy changes that could readily explain the reconfiguration of the American public firm sector to one that is more profitable, more valuable, and with bigger but fewer firms. These real economy developments largely tie to industrial organization via changes in the efficient scope and size of the firm (according to much academic analysis) or changes in antitrust enforcement (according to common progressive political views). In a single article, this explanatory effort can only be exploratory. We build a baseline: There are fewer firms, but the firms are much more profitable, bigger, with investment, revenue, and employment growing in line with the economy’s growth since 1996, and often in more concentrated industries. We show why the legal explanation is unlikely to be the complete story for the package of changes over the past quarter-century and plausibly not even the most important one. Corporate policymakers should adjust appropriately.

Keywords: IPOs, public companies, corporate law, private equity, venture capital, securities regulation, merger guidelines, monopolization, concentration, Sarbanes-Oxley, antitrust

JEL Classification: G28, G30, G32, G34, G38, G18, K21, K22, L10, L12, L13, L40, L41, L43

Suggested Citation

Roe, Mark J. and Wang, Charles C. Y., Half the Firms, Double the Profits: Public Firms' Transformation, 1996-2022 (May 16, 2024). Journal of Law, Finance, and Accounting, Forthcoming, European Corporate Governance Institute – Law Working Paper No. 771/2024, Available at SSRN: https://ssrn.com/abstract=4372070 or http://dx.doi.org/10.2139/ssrn.4372070

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Charles C. Y. Wang

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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