Honey, we shrunk the market

Mergers and acquisitions

Research from the SEC shows a trend of mergers and acquisitions since 1990 in the United States, peaking in the late 1990s and followed by continued waves of activity that broadly reflect the ebbs and flows of economic cycles.² This long-term trend of mergers and acquisitions is a major reason why the number of public companies has shrunk: when two public companies merge, the net effect is to remove one public company from the market. 

Regulatory burden

Public companies have faced an increasing regulatory burden in recent decades. An example of this is the Sarbanes-Oxley Act of 2002 in the United States, enacted after corporate scandals at Enron and WorldCom. The purpose of the legislation was to uphold internal controls, auditor independence and executive accountability for financial statements. Yet an important effect of this change has been to make younger companies think long and hard about whether they want to take on the burden of public-company reporting. Without a steady stream of younger companies to replace older companies that de-list, the net effect is fewer public companies.

Private equity buyouts

The number and size of private equity funds has grown significantly in recent decades. This has been driven by increased investment from pension plans and endowments, as part of a growing allocation to private equity and credit. The result has been an abundant source of capital for private equity buyouts, in which a private equity firm acquires control of a public company and takes it private. Each take-private transaction reduces the number of public companies.

Overall, the trend of fewer public companies has some important implications for investors, which we discuss below.

When there are fewer public companies, stock markets become less diverse. Markets may become more weighted towards larger companies, increasing the concentration of risk in a few sectors and reducing the potential benefits of diversification.

The U.S. market in the early 1970s, for example, was dominated by the Nifty Fifty stocks, familiar large names that investors believed they could simply buy and hold. These stocks crashed spectacularly in 1973-74 and struggled for the rest of the decade. However, small-cap stocks performed strongly, especially in the latter half of the decade.³ This shows the importance of diversification beyond a narrow range of large-cap stocks.⁴ 

A generation later, dot-com stocks had a dizzy rise and fall from the mid-1990s to the early 2000s, creating a "lost decade" for the S&P 500 in the 2000s. Not all stocks remained in the doldrums, though. Value stocks were less affected during the 2000s and came through with a return quite close to the market's long-term average.⁵ 

Large-cap stocks can boom for multi-decade periods, creating investment portfolios that are increasingly concentrated in large-cap growth and that may depend on assumptions such as high levels of capital expenditure or relatively low interest rates. While large-cap growth remains a core part of the U.S. market, investors can also diversify their exposure in a number of ways, including small-value, low-volatility and international stocks, as well as high-quality bonds.

A second implication of fewer public companies is that markets may become more expensive. Since 2010, the fortunes of the U.S. stock market have been closely tied to technology, most recently AI. The big winners have been mega-cap stocks with market capitalizations that can run into the trillions. This effect is amplified by the rise of index investing, where dollar-cost averaging by individual investors, whether through RRSPs, 401(k)s or defined-contribution pensions, has created a "passive bid" for stocks that tends to flow into increasingly expensive stocks, since many key stock indexes are weighted based on market capitalization.

Naturally, the declining number of public companies is not the only factor that may cause stock markets to trade at higher valuations. But it's an important part of a trend towards investing on auto-pilot, where investors may allocate to market-cap weighted indexes without caring or even knowing about valuation. In theory, a growing number of smaller companies coming to market through IPOs would encourage investors to shop around for the most promising opportunities. In practice, the next big thing has mostly come from the next big company, bidding up the overall price of the market.

Historically, the S&P 500 has traded at a price-to-earnings ratio in the high teens, far below its current level in the high 20s.⁶ Investors who consider the full range of global equity markets, including Canada, Europe and Asia-Pacific, may have the opportunity to diversify by valuation, reducing the risk of putting too much of their portfolio in the most expensive markets.

A final implication of fewer public companies is that some of the most promising high-growth companies or "unicorns" may stay private for longer, or even not go public at all. Companies like OpenAI or SpaceX now command valuations higher than the vast majority of public companies but have been able to grow without needing public capital markets.⁷ This puts access to high-growth companies in the hands of founders, venture capitalists and institutional insiders, without providing access to regular investors. This trend raises questions that go beyond return on investment or portfolio diversification.

The first question is about access to economic opportunity. In the 1980s and 1990s, for example, investors of moderate means had the opportunity to buy shares in the most promising new public companies, some of which are included decades later in the Magnificent Seven group of leading U.S. stocks. What does society look like if investors of moderate means, already feeling the impact of stagnant real wages and rising housing costs, don’t have access to the next generation of wealth-creating businesses?

The second question is about the role of the investor as citizen. Today's unicorn businesses are engaged in initiatives that could profoundly change the experience of human life, such as artificial intelligence and space exploration. Public markets provide a forum, through reporting from companies, questions from the media and pressure from civil society groups, to weigh the opportunities and risks of these developments. 

• The number of publicly-listed companies in the United States and Canada has fallen sharply since the 1990s, caused by factors such as mergers and acquisitions, an increased regulatory burden for public companies and private equity buyouts. This has several implications for investors.
• Stock markets have become less diverse, emphasizing top companies in a few sectors. After previous large-cap bubbles burst, in the 1970s and 2000s, the U.S. market struggled for most of the decade. Investors have many ways to diversify beyond large U.S. stocks, including small-value, low-volatility and international stocks, as well as high-quality bonds.
• Stock markets have become more expensive, as market-cap weighting and index investing have created a passive bid for stocks from RRSPs, 401(k)s and defined-contribution pensions, without much regard for valuation. Investors may wish to consider how they're diversified by valuation, in terms of their allocation to U.S., Canadian and international markets. 
• Unicorn companies are staying private for longer. This raises questions about whether investors of moderate means will have access to economic opportunity and highlights the role of the investor as citizen through the forum of public markets.

¹ Globe and Mail, July 5, 2024 Opens a new window.. Data for TSX listings includes operating companies only, excluding funds such as ETFs.

² U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis, Analysis of Merger & Acquisition Activity, white paper, June 2025 (PDF, 645 KB) Opens a new window.. Refer to Figure 1A, U.S. M&A Activity Over Time, page 2.

³ U.S. small value stocks returned 14.97% annualized in the 1970s, with particularly strong performance in the second half of the decade. Kenneth French, data library, Bivariate sorts on Size, B/M, OP and Inv, 6 Portfolios Formed on Size and Book-to-Market (2 x 3), SMALL HiBM, average value-weighted returns, annualOpens a new window..

⁴ Despite the struggles of the 1970s, the Nifty Fifty as a group more or less kept pace with the broader stock market from 1972 to 1998, rewarding investors who had the patience to hold for the long term. Ben Carlson, July 2, 2020 Opens a new window.

⁵ U.S. small value stocks returned 10.44% annualized in the 2000s. Kenneth French, data library, Bivariate sorts on Size, B/M, OP and Inv, 6 Portfolios Formed on Size and Book-to-Market (2 x 3), SMALL HiBM, average value-weighted returns, annual Opens a new window..

⁶ S&P 500 index, P/E ratio by yearOpens a new window.. 

⁷ Valuations of private companies are typically implied from their most recent financing. For example, a private company that sells 10% of its common equity for $10 billion would have a "pre-money" valuation of $100 billion, since $10 billion is 10% of $100 billion. The company would have a "post-money" valuation of $110 billion — adding the new equity capital of $10 billion to the pre-money valuation of $100 billion.