The views expressed are the personal views of the presenter and do not reflect those of the PCAOB, members of the Board, or the PCAOB staff.

The views expressed are the personal views of the presenter and do not reflect those of the PCAOB, members of the Board, or the PCAOB staff.

Where Have All the IPOs Gone? Jay R. Ritter Warrington College of Business Administration University of Florida December 2017

3/1/1980 3/1/1981 3/1/1982 3/1/1983 3/1/1984 3/1/1985 3/1/1986 3/1/1987 3/1/1988 3/1/1989 3/1/1990 3/1/1991 3/1/1992 3/1/1993 3/1/1994 3/1/1995 3/1/1996 3/1/1997 3/1/1998 3/1/1999 3/1/2000 3/1/2001 3/1/2002 3/1/2003 3/1/2004 3/1/2005 3/1/2006 3/1/2007 3/1/2008 3/1/2009 3/1/2010 3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 Number of Domestic Companies Listed on CRSP 8000 Number of Domestic Companies Listed on CRSP 7000 6000 5000 4000 3000 2000 1000 0 Date Note: Operating companies only (i.e., no limited partnerships, closed-end funds, REITs, ETFs) listed on Nasdaq, NYSE, and Amex (now NYSE MKT). CRSP is the University of Chicago s Center for Research in Security Prices. Quarter-end numbers are plotted, 1980-2016. 3

Number of IPOs Average First-day Return IPO volume has been very low in the U.S. since 2000 800 In 1980-2000, an average of 310 firms went public every year In 2001-2016, an average of 108 firms went public every year 80 700 70 600 60 500 50 400 40 300 30 200 20 100 10 0 0 Number of Offerings (bars) and Average First-day Returns (line) on US IPOs, 1980-2016 4

U.S. IPO Volume has been particularly low for small firms Small firm IPOs are defined as IPOs with less than $60 million in LTM sales ($2016) 400 350 300 250 small 200 150 100 big 50 0 Number of U.S. IPOs with pre-ipo Annual Sales less than or greater than $60m/Year ($2016) 5

Doidge, Karolyi, and Stulz (2017 Journal of Financial Economics) attribute the drop in U.S. listings since the 1997 peak to 1) a drop in IPO volume, and 2) an increased rate of acquisitions by publicly traded companies. These two causes are of equal importance. Buyouts have been much less important than mergers. 6

Number of IPOs Average First-day Returns Number of Offerings (bars) and Average First-day Returns on Toronto Stock Exchange IPOs, 1980-2016 80 30% 70 25% 60 20% 50 15% 40 10% 30 5% 20 0% 10-5% 0-10% TSX Venture Exchange (and its predecessor, the Vancouver Stock Exchange) IPOs are not included. Fund and unit offers are not included (only operating companies are counted).

Number of Offerings and Average First-day Returns on Japanese IPOs, 1980-2014 Source: Takashi Kaneko and others

Number of IPOs Average First-day Returns Number of Offerings and Average First-day Returns on Chinese IPOs, 1990-2016 (There were no IPOs in 2013, due to a CSRC moratorium) 350 700% 300 600% 250 500% 200 400% 150 300% 100 200% 50 100% 0 0% Source: Jia, Ritter, Xie, and Zhang (2017)

What Is Driving These Trends? Jay R. Ritter Warrington College of Business Administration University of Florida December 2017

Why Has IPO Volume Been So Low?

Conventional Wisdom: The IPO Market Is Broken In the U.S., the Sarbanes-Oxley Act of 2002 (SOX) has imposed costs on publicly traded firms, especially small firms Decimalization, Reg FD in 2000, and the Global Settlement in 2003 have led to a drop in analyst coverage for small firms, lowering their P/E ratios, and the collapse of the IPO ecosystem

The Economies of Scope Hypothesis Increased economies of scope Increased importance of speed to market Getting big fast is more important than in the past 13

Changes in the Product Market The profitability of small independent firms has declined relative to the value created as part of a larger organization that can quickly implement new technology and benefit from economies of scope 14

Evidence The percentage of small firms that are unprofitable has increased Percentage of U.S. seasoned public companies with negative EPS, 1980-2015 15

Small firm IPOs have become less profitable Percentage of U.S. IPOs from the prior 3 years with negative EPS in fiscal year t Source: Table 2, columns 2 and 4 of Gao, Ritter, and Zhu Where Have All the IPOs Gone? December 2013 Journal of Financial and Quantitative Analysis, updated 16

Young growth firms are more likely to be involved in an M&A transaction Either as an acquirer or being acquired Uptrend started in early 1990s

Percentage of VC Exits IPO Exits for VC-backed Firms Have Been Limited 100 80 60 40 %IPO M&A 20 0 Source: NVCA 2016 Yearbook Figures 9 and 10 and 2016 Yearbook Figures 4.02 and 10.0 18

U.S. small firm IPO returns have been disappointing 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Mean 3-year buy-and-hold returns on IPOs (blue) and style-matched seasoned firms (red) Small firm IPOs Large firm IPOs 1980 2000 2001 2015 1980 2000 2001 2015 $60 million in inflation adjusted pre-ipo annual sales cutoff, returns not including first-day return and ending in Dec. 2016 19

European small firm IPOs returns have also been low 25% 20% 15% 10% 5% 0% -5% 1995-2000 2001-2008 1995-2000 2001-2008 Small firms Large firms BHR Benchmark (FTSE EuroMID) Small firm (< 30m in sales) IPO 3-year buy-and-hold returns are lower than for large firm IPOs (returns are measured from the 22 nd trading day closing market price). Source: Ritter, Signori, and Vismara (2013) Economies of Scope and IPO Activity in Europe 20

Conclusion Especially for tech firms, getting big fast is more important than it used to be Organic growth takes too long, so trade sales have become more popular than remaining independent Small publicly traded firms have not been undervalued Small firms have been struggling to make money throughout the world

Conclusion Certain countries, such as China, have many IPOs as the country catches up