Where Have All the IPOs Gone?

Abstract

During 1980-2000, an average of 310 companies per year went public in the U.S. Since the technology bubble burst in 2000, the average has been only 99 initial public offerings (IPOs) per year, with the drop especially precipitous among small firms. Many have blamed the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement’s effects on analyst coverage for the decline in U.S. IPO activity. Our alternative explanation posits that the advantages of selling out to a larger organization, which can speed a product to market and realize economies of scope, have increased relative to the benefits of remaining as an independent firm. Consistent with this hypothesis, we document that small company IPOs have had declining profitability and an increasing probability of being involved in acquisitions.

Keywords: IPO volume, trade sales, economies of scope, effects of Sarbanes-Oxley, VC exits

JEL Classification: G24, G38