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Job creation has become a critical issue that seriously threatens any realistic hope for a sustained U.S. economic recovery. Our most recent survey of chief financial officers found that only 29% planned to increase their work force over the next six months, while 22% planned to reduce.
Among the many suggestions that have been discussed in creating jobs and reducing unemployment, we have yet to hear of the positive role that resuscitating the initial public offering market can play.
The 1990s saw the net creation of more than 20 million jobs in the U.S. This period of time was characterized by an average of 530 corporate IPOs per year (excluding funds, LPs, REITs and SPACs), the vast majority of which were below $50 million and nearly half of which came from traditional America (neither venture capital nor private equity sponsored).
Let Them Fail
These IPOs inspired confidence and created a source of capital that increased equity investment in private companies. This vibrant small-company IPO market created a "virtuous circle" of capital formation, job growth, innovation and increases in tax revenues.
Yes, smaller companies have higher failure rates, but they also have bigger successes (Intel's IPO was only $8 million in 1971) and are the source of many breakthroughs that enhance our quality of life. In fact, were society not to embrace the right of entrepreneurs to fail honestly, there would not be a biotech or computer industry as we know them today.
This small-company economic engine went into decline, however, during the dot-com bubble, as market structure changes, designed to save investors money, were amplified by dramatic advances in Internet technology. These factors combined to erode the economic model that provided the incentives for small Wall Street firms to support small public companies with critical equity research, sales and capital commitment.
From 2000 to 2009, the U.S. produced an average of only 126 corporate IPOs per year — down over 76% from the prior decade — nowhere near enough to replace the number of public companies (360 per year) that are lost to delistings or to match the number required (520 per year) to increase the population of public companies at 3% per year (roughly the rate of GDP growth).
Common sense dictates that when the number of IPOs declines, the availability of capital for job creation shrinks; when the number of companies delisted from stock markets exceeds the number listed, jobs are shed; this "circle of destruction" in turn undermines investment interest in private companies, considered the "foundation of job formation" — which then becomes the "foundation for unemployment."
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Posted By: jpdwn(935) on 7/4/2010 | 7:52 PM ET
Or more succinctly, try spitting into the wind.
Posted By: jpdwn(935) on 7/4/2010 | 7:50 PM ET
Sarbanes-Oxley, PPACA, Cap n' Trade, Card Check. Opportunities await all who start new businesses and especially those who become public companies. But wait - there's more....
Posted By: chunga2(120) on 7/4/2010 | 10:48 AM ET
Sounds like Sarbanes-Oxley was used to prevent another Enron (but not Lahmann Bros etc) but is preventing employment and growth. Maybe the geniuses in Washington could think of a law to cripple farming to fix obesity.
Posted By: BradO(3050) on 7/3/2010 | 4:19 PM ET
Sarbanes-Oxley is a key piece in the lack of IPO's. The cost of compliance is a key reason why companies can't afford to list on the exchanges. And it has done such a great job of preventing fraud and economic collapse.
Posted By: Serfdumb(2435) on 7/3/2010 | 12:52 AM ET
Let's create a new stock market to support small companies and capital formation, a market that can't help but drive economic growth, cut budget deficits and not cost taxpayers a dime-Absolutely, if you could create a trusted, laissez-faire market to put all the frozen money to work we could recover quickly, the trick is to keep the Gov't monkeys and Wall St. sharks away. There are millions of talented people w/good ideas but the current environment is screaming don't bother, you'll get screwed.
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