Sunday, March 18, 2018

Weekend reading links

1. The Economist on the decline of publicly listed companies in the US,
According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496... Mr Ritter attributes much of the decline in the number of companies that are listed to the difficulty of being a small public company... listing requirements have become more burdensome over time. For example, he notes that the prospectus for Apple Computer’s public offering in 1980 ran to a mere 47 pages and listed no risk factors, despite its novel product, inexperienced leaders and formidable competitors. The prospectus for Blue Apron, a meal-delivery company that listed last year, weighed in at 219 pages, with 33 devoted to risks, presumably intended to pre-empt litigation. One of those risks was the possibility that Blue Apron would not “cost-effectively acquire new customers”.
2. Staying on with the declining of public markets, Craig Doidge, Kathleen M. Kahle, G. Andrew Karolyi, René M. Stulz have a paper which analyses the trends in US equity markets. Their findings are striking,
Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of $3.6 trillion of equity (in 2015 dollars) rather than net issuers. The propensity to be listed is lower across all firm size groups, but more so among firms with less than 5,000 employees. Relative to other countries, the U.S. now has abnormally few listed firms. Because markets have become unattractive to small firms, existing listed firms are larger and older. We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital.
But, this trend may be unique to the Wall Street capitalist that US follows 

The challenge posed by intangible assets intersects with both the limitations of prevailing accounting practices as well as the excessive transparency of disclosure requirements, 
Public markets are better suited for firms with mostly tangible assets than for firms with mostly intangible assets. This is especially true when the usefulness of the intangible assets has yet to be proven on a large scale. Sometimes the market is extremely optimistic about some intangible assets, which confers a window of opportunity on firms with such assets to go public. But otherwise, firms with unproven intangible assets may very well be better off to fund themselves privately. Accounting information conveyed by U.S. GAAP for such firms is of limited use because GAAP treats investments in intangible assets mostly as expenses, so that these assets may very well not show up on firms’ balance sheets. Private funding allows firms to convey information about intangible assets more directly to potential investors who often have specialized knowledge, something that they could not convey publicly... The issue with disclosure of intangible assets is not what firms have to disclose. Rather, it has to do with the nature of the intangible assets they need to disclose. Once an idea is made public it becomes possible for other firms to use it... Investment in intangible assets is highly sensitive to the legal environment in which a firm operates and to the pace of financial development it experiences. A plant is hard to steal. A new idea is not...
As intangible assets continue to increase in importance, it should not surprise us to see a further eclipse of public markets. This stalling of public equity market development should be more pronounced in a country like the U.S., where intangible assets are relatively more important for the corporate sector... this evolution also reflects that U.S. financial development has evolved in such a way that some types of firms can be financed more efficiently through private sources than through public capital markets because the intrinsic properties of intangible assets make it harder for them to be financed in public markets. No deregulatory action is likely to restore the public markets in this case. Instead, we should focus on creating a fertile ground for investment in intangible assets by having appropriate laws, appropriate financing mechanisms, and maybe new types of exchange markets, as these assets appear to be the way of the future for corporations.
3. Another paper by René M. Stulz, with Söhnke M. Bartram and Gregory W. Brown explore another consequence of the reduction in listed companies - correlatedness among stocks.
Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds.
4. Times reports of California's aggressive embrace of transit-oriented development (TOD) by way of a legislative Bill to allow eight-storied buildings around transit stations even if local communities object. The Bill proposes to allow apartments of upto 85 feet tall within half mile of train stations and a quarter-mile of high-frequency bus stops. It would overcome one fo the biggest stumbling blocks to increased densification in the region, entrenched local opposition.

5. Noah Smith point again to the rising business concentration in the US economy.
He describes the resultant dynamics a "toxic cycle"
As industries grow more concentrated, dominant companies become a bigger piece of the stock market, and their profit margins push stock valuations higher. Politicians naturally will be less willing to take steps to make markets more competitive, allowing superstar companies to become even more powerful. All the while, retirement accounts do OK, but workers’ wages and the economy suffer from decreasing competition.
6. Alec Schierenbeck makes the case for a progressive approach to the imposition of all forms of financial penalties. In simple terms, people should be made to pay fines based on their respective income levels. He argues that scaled fines, like in Finland and Argentina which have had them for than 100 years, are more equitable and have greater deterrence value.

7. One more consequence of quantitative easing - rising property prices in the world's largest cities. FT writes,

Over the past 10 years, the life-cycles of global cities such as London, New York and Sydney start to look very similar. They begin with central banks cutting rates; then foreign buyers are welcomed in, prices go up, high-end homes are built, capital appreciation drops and then cities are left with a lot of stock which is too expensive to sell.

8. Finally, from a nice FT essay on long-haul flights, to put air transportation in perspective,
The world has never been smaller, as it spins beneath a web of flight paths; at any one time, there are an average of almost 10,000 aeroplanes in the air, carrying 1.2m people between countries and continents at more than 500mph.
Yes, 1.2 million people in air at any time! 

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