In what will be a recurring feature on our blog, today we
present our first guest blogger, Professor Jay Ritter, renowned IPO researcher.
Professor Ritter is the Cordell Professor of Finance at the University of
Florida and has published more than 30 papers regarding equity issuance. Here,
Dr. Ritter discusses the results of his recent research about the shrinking number
of IPOs since 2000.
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
IPO activity. Xiaohui Gao, Zhongyan Zhu, and I offer the economies of scope
hypothesis as an alternative explanation. We posit 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
operating as an independent firm. Consistent with this hypothesis, we document
that small company IPOs have had declining profitability and an increasing
likelihood of being involved in acquisitions, either as an acquiring firm or as
a target. Both the profitability trend and the acquisition trend started in the
early 1990s.
Alternatively stated, the reason that few small high-tech
companies have been going public rather than selling out to a larger firm in a
“trade sale” is that getting big fast is more important than it used to be.
Remaining as an independent firm and growing organically is not the
profit-maximizing strategy for most startup tech firms because it takes too
long. Thus, the decline of small company IPOs is not a private market versus
public market issue, but is instead a big company versus small company issue.
