Today’s public companies aren’t your father’s corporations.

The public sector has experienced massive changes in the past 40 years. Not only are there fewer public companies than there were in the 1970s, but they are older, larger, and generally less profitable.

A paper that appears in the Summer issue of the Journal of Economic Perspectives takes a look at the evolution of the US public corporation and asks whether these institutions are “in trouble.” The outlook is not overwhelmingly positive.

Authors Kathleen Kahle and René Stulz find that the firms that remain public today are mostly “survivors” and few of their peers are eager to join their ranks.

Figure 1 from Kahle et al. (2017)

The chart above compares the number of listed firms on the New York Stock Exchange, Nasdaq, and Amex, to their market capitalization. In 1975, the US had 4,819 listed firms, the number increasing steadily until reaching its peak in 1997 at 7,507. After that, the number plummeted, hitting 3,766 listed firms in 2015. Meanwhile, their aggregate market capitalization grew, illustrating how much larger companies today have become.

The authors return to an argument made nearly 30 years ago by Michael Jensen in which he predicted the demise of public firms because they were beset by agency problems. That is, public corporations were inefficient because they couldn’t resolve conflicts between investors and management as easily as private firms.

The evidence so far doesn’t necessarily support that theory — US firms pay out more to shareholders than at any time since 1975. However, his prediction about the rise of private equity has proven accurate. In fact, private equity’s expanding role in financing companies may be one of the reasons why fewer companies feel compelled to go public.