New Lists and Seasoned Firms: Fundamentals and Survival...
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Transcript of New Lists and Seasoned Firms: Fundamentals and Survival...
First Draft: March 2001 Revised: July 2002
Not for quotation Comments solicited
New Lists and Seasoned Firms: Fundamentals and Survival Rates
Eugene F. Fama and Kenneth R. French*
Abstract
The class of firms eligible for public equity financing expands dramatically in the 1980s and
1990s. After 1979, the rate at which new firms are listed on major U.S. stock exchanges jumps from
about 140 to near 600 per year. The characteristics of new lists also change. Cross-sections of
profitability and growth become progressively more disperse, profitability becomes more left skewed, and
growth becomes more right skewed. The result is a sharp decline in new list survival rates. The flood of
new lists eventually causes similar but more subdued changes in the characteristics of seasoned firms,
with a corresponding decline in survival rates.
* Graduate School of Business, University of Chicago (Fama), and Tuck School of Business, Dartmouth College (French). We gratefully acknowledge the helpful comments of Frank Easterbrook, Owen Lamont, Kenneth Lehn, Jonathan Macey, Richard Roll, Hans Stoll, and seminar participants at UCLA. We thank Jay Ritter for giving us his list of initial public offerings.
The market for publicly traded equity is the heart of a modern capitalist system, signaling the
terms on which investors are willing to bear residual corporate risks. The market for newly listed firms is
in turn a bellwether for the public equity market. It is the point of entry that gives firms expanded access
to equity capital, allowing them to emerge and grow. Examining the characteristics of newly listed firms
can provide interesting information about changes through time in the kinds of firms that are viable
candidates for public equity financing.
The issue is important. In a perfect capital market (that is, absent monitoring costs and other
frictions), investment is efficient: all wealth-creating projects are publicly financed, and their risks are
efficiently shared among investors. But when frictions cause some profitable projects to be financed
privately, or not undertaken at all, investment and risk sharing are inefficient relative to the zero-frictions
optimum. If security prices are rational, evidence that the class of firms that are publicly financed
broadens through time is evidence that demand conditions (the tastes of investors for different types of
risk) or supply conditions (monitoring costs or other frictions) have changed. To the extent that the
changes are due to supply conditions, the efficiency of investment and risk sharing improve.
Fama and French (2001) document that the rate of new listings, largely on NASDAQ, explodes
after 1979, from about 140 to near 600 per year. After 1979, on average about ten percent of listed firms
are new each year. Our earlier paper examines the characteristics (profitability and growth) of new lists
only in the listing year and not in much detail. Here we develop a detailed picture of the profitability and
growth of the NYSE-AMEX-NASDAQ new lists of 1973-2000 for the first five years after listing. And
we examine how changes in the characteristics of new lists during the sample period affect whether they
survive, disappear in mergers, or are delisted for poor performance.
Our results about the evolving characteristics of firms that are viable candidates for public equity
financing are easily summarized. The key words are dispersion and skewness. During 1980-2000, when
new lists are abundant, the cross-section of new list profitability drifts down, and the drift is stronger in
the left tail, that is, toward lower profitability. In contrast, the percentiles of new list growth drift up, and
the drift is stronger in the right tail, toward more rapid growth. New lists eventually become seasoned
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firms, and the profitability and growth of seasoned firms show subdued versions of the patterns observed
for new lists; profitability and growth become progressively more disperse, profitability becomes more
left skewed and growth becomes more right skewed. And we emphasize that although the process
accelerates after 1994 (when high-tech and internet-related new lists are abundant), the increasing
incidence of low-profitability high-growth firms is a long-term phenomenon, evolving slowly over the
last 20 years.
The drift in profitability and growth has a big effect on survival rates. The probability that a
seasoned firm continues to trade beyond the next ten years falls from 59.5% for the cohort of 1973 to
44.3% for the 1991 cohort. The probability that a new list survives its first ten years falls further, from
64.4% for the 1973 cohort to 37.0% for the 1991 cohort. Rates of disappearance in mergers do not trend
much during the sample period; on average, about one-third of the seasoned firms and one-fourth of the
new lists of a given year are absorbed within ten years in mergers. The decline in survival rates is thus
due to delistings for poor performance. The ten-year delist rate rises from 13.5% for the seasoned firms
of 1973 to 21.7% for the 1991 cohort. The ten-year delist rate for new lists rises much further, from
14.4% for the 1973 cohort to 40.2% for the cohorts of 1981-1991. Thus, about two in five of the new lists
of 1981-1991 are delisted within ten years for poor performance.
For both new lists and seasoned firms, most of the changes in the cross-sections of profitability
and growth during 1980-2000 trace to small new lists. Since large firms account for the lion’s share of
most economic aggregates, one might argue that changes in the characteristics of small new lists are
unimportant. The changes are, however, important for understanding the market for listed firms, that is,
the kinds of firms that are viable candidates for public equity financing and thus unrestricted risk sharing.
In essence, our results say that that changes in demand or supply conditions lead to increased sharing of
the risks of firms with low profitability and high growth, a combination that produces a large dose of
unhappy outcomes. Again, to the extent that this broadening of the kinds of firms publicly traded is due
to supply conditions (reductions in the costs of trading and holding such firms), the efficiency of the
economy’s investment and risk sharing are enhanced – as long as risks are properly priced.
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Finally, our results are related to those of Campbell, Lettau, Malkiel, and Xu (2001). They find
that the idiosyncratic dispersion of individual stock returns increases through time and the increase is
largely due to small firms. Our results suggest that the source of the higher return dispersion is increased
dispersion of profitability and growth, which largely traces to the post-1979 flood of small new lists.
We begin (section I) by detailing the rate of new listings during 1973-2000. Section II examines
the average profitability and growth of new lists and seasoned firms. The central evidence on the
evolution of the cross-sections of profitability and growth is in section III. Section IV examines survival
rates, and section V studies the links between survival rates and the profitability and growth of new lists
and seasoned firms. Section VI concludes and offers some perspective on whether the expansion of the
class of publicly traded firms during 1980-2000 is due to changes in demand or supply conditions.
I. New Lists: Counts and Size
Figure 1 shows annual counts of combined NYSE, AMEX, and NASDAQ new lists for 1973-
2000. To be in the sample, a firm must be on the files of the Center for Research in Security Prices
(CRSP) and have a share code of 10 or 11 (ordinary common shares), so ADRs and closed end mutual
funds are excluded. We define a new list as the first appearance of a firm on CRSP. Thus, our new lists
do not include firms that switch from one of the three exchanges to another. We also exclude tracking
stocks, spin-offs, and firms that go public after going private.
The tests start in 1973, the beginning of the CRSP NASDAQ period. Prior to 1973, newly public
firms typically trade over the counter (OTC, not covered by CRSP), and new listings on the NYSE and
AMEX (covered by CRSP) are mostly seasoned firms. NASDAQ absorbs most of the OTC market, and
for the post-1972 period, the CRSP files provide a rather complete picture of publicly traded firms.
We examine two types of new lists: initial public offerings (IPOs) and non-IPOs. A firm is
defined as an IPO if it is in the IPO sample provided by Jay Ritter (an updated version of that in Loughran
and Ritter (1995)) and its CRSP listing month is no more than ten months after its IPO. Non-IPO new
lists include (i) a small set of firms that are in the Ritter IPO sample but are listed on one of the three
4
exchanges more than ten months after their IPO, and (ii) a larger set of new lists not in the Ritter IPO
sample. The latter are primarily (i) tiny firms that trade OTC (pink sheets) and do not make it to one of
the three exchanges soon after their IPO, and (ii) some financial firms that are missing from the Ritter
IPO sample but would qualify as IPOs under the ten-month rule. Since our main focus is the economic
fundamentals of non-financial firms, we do not attempt to more accurately allocate financial new lists
between IPOs and non-IPOs.
One can argue that, to study the kinds of firms that are viable candidates for public equity
financing, the ideal sample is all IPOs. Our IPOs include only those listed quickly on one of the three
exchanges (primarily NASDAQ). We miss IPOs that initially trade OTC. Many of these eventually
appear in the sample of non-IPO new lists, and this is why we use IPOs and non-IPO new lists to make
inferences about the characteristics of new publicly traded firms. There is, however, a survivor bias in
this approach; (financials aside) non-IPO new lists include only those initially unlisted IPOs that are
relatively successful and so eventually make it to one of the three exchanges. It is thus likely that our
inferences about the kinds of firms that qualify for public equity financing are conservative.
There is a more aggressive justification for our approach. One can argue that during 1973-2000,
IPOs not traded on the NYSE, AMEX, or NASDAQ are typically illiquid and so do not get the benefits of
unrestricted risk-sharing. In this view, during 1973-2000, an exchange listing is the better signal that a
firm qualifies for unrestricted risk sharing. Thus, examining new lists (IPOs and non-IPO) is a sound
approach. Moreover, changes in the characteristics of new lists related to changes in listing requirements
are not a problem if the exchanges compete for listings. Competition implies that listing requirements are
themselves the result of demand conditions (the tastes of investors for different types of risks) and supply
conditions (monitoring costs, information costs, and other frictions) that determine the types of firms that
qualify for unrestricted risk sharing.
Two facts are apparent in Figure 1. First, after moderate increases from 1973 to 1979, new lists
surge – from 220 in 1979 to 438 in 1980 and 620 in 1981. After 1979, only four years have less than 400
new lists. For 1980-2000, new lists average 598 per year (Table 1). There are not many IPOs in the
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1973-1979 period (on average 30 per year); most new lists are non-IPOs (119 per year). But during 1980-
2000, IPOs are more numerous than non-IPO new lists, averaging 372 per year, versus 226 for non-IPO
new lists. We can also report that more than 90% of the new lists of 1973-2000 are on NASDAQ.
Table 1 summarizes the size of annual new lists. We measure size as market capitalization, ME,
stock price times shares outstanding. The table shows the averages of the yearly average NYSE ME
percentile of new lists and the average local (listing) exchange ME percentile. When compared to firms
on their respective exchanges (NYSE, AMEX, or NASDAQ), new lists are on average medium sized.
For 1973-2000 the average local exchange ME percentile of all new lists, 50.3, is just a bit above the local
exchange median. There is only one year, 1976, when the average local exchange ME percentile of all
new lists is below 40. IPOs are on average larger than non-IPO new lists. For 1973-2000 the average
local exchange ME percentile of IPOs is 57.9, versus 43.1 for non-IPO new lists. But in absolute terms
new lists are typically tiny. The average NYSE ME percentile of the new lists of 1973-2000 is 12.1
(Table 1). IPOs are on average at the 15.1 NYSE ME percentile, versus 8.5 for non-IPO new lists.
The surge in new lists after 1979 is not associated with a decline in size. The average NYSE and
local exchange ME percentiles of new lists (IPOs and non-IPOs) increase from 1980-1989 to 1990-2000
(Table 1). More important, during 1973-2000 there is a progressive thinning of the extreme left tails of
the size distributions of new lists (IPOs and non-IPO). For example, the proportion of new lists below the
20th NYSE ME percentile falls from 85.3% for 1973-1979 to 70.1% for 1990-2000 (Table 1) and the
proportion below the 10th percentile falls from 75.2% to 50.0%. Thus, the evolution of new list
fundamentals documented below (increasing left skewness of profitability and right skewness of growth)
is not due to higher frequencies of the tiniest firms. This point is important when we later (in the
concluding section) discuss whether the broadening in the types of firms publicly traded during 1980-
2000 is due to demand or supply conditions.
Finally, with the high rate of new listings for 1980-2000, on average around ten percent of listed
firms are new each year (Table 1). New lists are mostly small, however, and despite the explosion in their
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numbers, the fraction of the aggregate market value of listed firms accounted for by annual new lists is
also small, averaging 2.08% for 1980-2000 and never exceeding 4.1%.
II. Average Profitability and Growth
Table 2 summarizes the evolution of fundamentals (average profitability and growth rates) for the
non-financial new lists of 1973-2000 for the first five years firms are listed. The fundamentals are also
shown for matched cohorts of seasoned non-financial firms. Seasoned firms are defined as NYSE,
AMEX, and NASDAQ firms listed more than five years, and firms already on NASDAQ at the end of the
CRSP startup period (April 1973). Fundamentals for all firms (not shown) are similar to those of
seasoned firms. The samples in Table 2 are smaller than in Table 1 because financial firms are excluded
from Table 2 and because the fundamentals are sometimes missing from the Compustat data source.
The fundamental variables in Table 2 are ratios of aggregates. For example, the profitability in
year t+τ of the new lists of year t, Et+τ/At+τ, is the ratio of aggregate earnings before interest for t+τ of the
new lists of year t divided by their aggregate t+τ assets. In effect, then, we measure fundamentals as if
the new lists of year t are a single firm. Equivalently, ratios of aggregates are size-weighted averages of
the ratios for individual firms. For example, the estimate of new list profitability weights the profitability
of an individual year t new list by the ratio of its t+τ assets to the total t+τ assets of all year t new lists.
Size-weighted averages give more weight to larger firms and so might not provide a picture of
fundamentals for the “typical” firm. But Table 2 is just an introduction to salient characteristics of
fundamentals for new lists and seasoned firms. We later examine time-series of cross-sections of
profitability and growth, which are the core of our story. Finally, our estimates of fundamentals for t+τ
can cover only the firms of year t with Compustat data for t+τ. Firms that disappear before t+τ are not
covered in the estimates.
7
A. Growth
New lists grow faster than seasoned firms. The growth rate of total assets, dA/A = (At-At-1)/At-1,
for the seasoned firms of 1973-2000 averages 10.1% per year. The average first-year growth of IPOs is
78.7%, declining rapidly to 20.0% in the fifth listed year. The average first-year growth of non-IPO new
lists is 19.9%, with no systematic tendency in subsequent years. Thus, IPOs initially grow faster but
eventually converge on the growth rates of non-IPO new lists, which in turn grow about twice as fast as
seasoned firms. These results suggest that non-IPO new lists come into the sample while still in a high
growth phase but after the period of extreme initial growth typical of IPOs.
B. Profitability
In the listing year, IPOs are on average more profitable than non-IPO new lists. This is true for
the full sample period and all subperiods in Table 2. For the full sample period, IPO profitability declines
in the years after listing, but E/A rises for non-IPO new lists. As a result, the two groups have similar
average profitability after the second listed year. Thus, as they age, the profitability and growth of IPOs
come to look more like those of non-IPO new lists. More interesting, for the full 1973-2000 period, IPOs
are on average more profitable in the listing year than seasoned firms. But after the listing year, IPO
profitability falls and they become progressively less profitable than seasoned firms.
Figures 2a to 2c give year-by-year details on the average profitability of new lists and seasoned
firms in the first, third, and fifth listed years. The year on the horizontal axis is always the listing year.
For example, plotted at 1973 in Figures 2a to 2c are the 1973, 1975, and 1977 average profitability of the
new lists of 1973 and the seasoned firms of 1973. The figures thus compare the evolution of average
profitability for cohorts of new lists and seasoned firms.
The average profitability of new lists in Figures 2a to 2c varies much more across cohorts than
the average profitability of seasoned firms. Despite this high volatility, there are clear patterns in the
relation between new list profitability and that of seasoned firms. The first-year average profitability of
IPOs (in Figure 2a) is higher than the profitability of seasoned firms in all but two of the first 22 years,
8
from 1973 to 1994. In contrast, the first-year profitability of non-IPO new lists tends to be below that of
both IPOs and seasoned firms throughout the sample period. After 1994 the first-year profitability of new
lists (IPOs and non-IPOs) falls progressively further below that of seasoned firms. The first-year
profitability of IPOs goes negative in 1999, for the first time in the sample period. The first-year
profitability of non-IPO new lists is negative in 2000, but the highly volatile first-year profitability of
these firms is also negative in three earlier years.
The decline in IPO profitability in the years after listing is evident in Figures 2b and 2c. In
contrast to the higher listing year average profitability of IPOs in the years up to 1994, IPO average
profitability in the third and fifth listed years tends to be below that of seasoned firms for cohorts after
1980 or perhaps 1978. And after the listing year, IPOs are not systematically more or less profitable than
non-IPO new lists. In short, for at least the last 20 years of the sample period, new lists (IPOs and non-
IPOs) are on average less profitable after their second listed year than seasoned firms.
C. The Small-Firm Depression
Fama and French (1995) document a sustained decline in the profitability of small firms relative
to big firms in the 1980s. Figure 3 confirms that small firms (total assets below the NYSE median) are
more profitable than big firms until 1981. Thereafter, small firms are less profitable than big firms. After
narrowing in 1988-1993, the gap between big and small firm profitability widens dramatically. In 2000,
average E/A is 6.4% for big firms and only 0.7% for small firms. Since new lists are mostly small, it is
interesting to examine whether the relatively low profitability of small firms during the 1980s and 1990s
is related to the flood of small new lists and the low profitability of new lists as they age.1
Figure 3 confirms that much of the small-firm depression of the 1990s is due to new lists. Until
1990, the profitability of small new lists (defined as firms listed within the last five years with total assets
below the NYSE median) is similar to the profitability of small seasoned firms. Thereafter, small
1When we examine fundamentals (profitability and growth rates), we define size in terms of assets, not market equity. Defining size in terms of market equity tends to allocate firms that are large in terms of assets but have low profitability to the small group. As a result, small market equity firms tend to look more like weak firms than when size is defined in terms of assets.
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seasoned firms are only a bit less profitable than big firms, but small new lists are much less profitable.
In 2000, for example, average E/A is 6.4% for big firms and 5.5% for small seasoned firms, but it is a
miserable -8.8% for small new lists. (And keep in mind that we can measure profitability only for firms
that survive.) Skipping the details, the gap between the profitability of big firms and seasoned small firms
narrows further if we restrict seasoned firms to those listed for at least ten years. In fact, with this tighter
definition, seasoned small firms are actually more profitable than big firms in 1992, 1993, and 2000. It is
clear that, with their sustained low profitability, the flood of small new lists in the 1980s and 1990s plays
a substantial role in the sustained low profitability of all small firms.
Finally, Jain and Kini (1994) examine the profitability of the IPOs of 1976-1988. They find that
when firms go public, median IPO profitability is higher than the median profitability of firms in the same
industry. After the IPO, median profitability falls toward that of the industry-matched sample, and the
median investment of IPO firms is higher than for the industry-matched sample. Mikkelson, Partch, and
Shah (1997) report similar results for the IPOs of 1980 to 1983. This earlier IPO evidence is roughly
similar to our results for the IPOs of the late 1970s and early 1980s, but it does not describe IPO
performance later in our sample. In the 1990s, post-listing IPO profitability deteriorates to levels far
below that of seasoned firms. And after 1994, even the first-year profitability of IPOs is lower than the
profitability of seasoned firms. We also show that the new lists of 1980-2000 that are not recent IPOs
look much like aging IPOs; that is, they are less profitable but grow faster than seasoned firms.
III. Cross-Sections of Profitability and Growth
The average profitability and growth of new lists are not necessarily surprising, at least prior to
the profitability plunge after 1994. Thus, it is not surprising that firms have initial public offerings when
profitability is high and they have strong demand for equity capital to finance rapid growth. And if initial
profitability is unusually high, it is not surprising that it falls in the years after listing, as growth causes
firms to deplete their most profitable investment options. The interesting surprises, and the core of our
10
story, are in the changes through time in the dispersion and skewness of profitability and growth for new
lists and seasoned firms.
A. Profitability
Figure 4a shows time series of the cross-sections (10th, 25th, 50th, 75th, and 90th percentiles) of
first-year profitability, E/A, for new lists. Until 1978, the 10th to 90th percentiles of new list profitability
cover a rather narrow range (relative to subsequent years) and unprofitable firms are rare. Thereafter, all
percentiles of new list profitability fall. For example, median first-year E/A for the new lists of 1978 is
0.115; it declines to 0.066 in 1990 and 0.025 in 1998, and then drops below 0.0 in 1999 and 2000. Thus,
more than half of the new lists of 1999 and 2000 are unprofitable in their listing year. But the dominant
trait of Figure 4a is the increasing dispersion in first-year profitability, due to increasing left skewness.
The 25th percentile of E/A falls from 0.084 in 1978 to -0.055 in 1990 and -0.362 in 2000. The decline in
the 10th percentile is even more extreme, from 0.073 in 1978 to -0.419 in 1990 and -0.911 in 2000. In
short, during 1980-2000, when new lists are consistently abundant, firms with low – indeed severely
negative – current profitability become progressively more acceptable candidates for public equity
financing.
Figure 4b shows annual cross-sections of profitability for firms listed in the previous five years.
Cumulating over five years provides longer-term perspective on the performance of new lists. Though
smoother, the percentiles of E/A for new lists of the previous five years are similar to those of first-year
E/A. Thus, the increasing dispersion and left skewness of new list profitability are not just a listing-year
phenomenon. Skipping the details, we can also report that increasing dispersion and left skewness are
common to the evolution of profitability for both IPO and non-IPO new lists.
Typically, more than 95% of new lists are small (assets below the NYSE median), so small firms
dominate the distributions of profitability in Figures 4a and 4b. (Indeed, since they are so similar to
Figures 4a and 4b, we do not include plots for small new lists.) Figure 4c shows that big new lists do not
share the extreme profitability traits of their small counterparts. Though the percentiles of E/A for big
11
new lists of the previous five years decline a bit through time, the cross-sections are rather compact and
do not show the strong left skewness that characterizes the distributions for all new lists.
Averaging over 1980-2000, about ten percent of listed firms are new each year. How does this
flood of new lists affect the cross-sections of profitability for seasoned firms and all listed firms? After
they have been listed for five years, we reclassify new lists as seasoned. The cross-sections of
profitability for all seasoned firms in Figure 5a become progressively left skewed during 1980-2000, but
less so than for new lists. This is not surprising. Economic logic – along with the evidence below on the
low survival rates of new lists – says that firms cannot sustain large losses indefinitely. As in the case of
new lists, the profitability cross-sections for all seasoned firms are dominated by small firms. Figure 5b
shows that the dispersion of profitability for big seasoned firms increases only a bit through time, and the
distribution remains relatively compact and roughly symmetric. The median profitability of seasoned big
firms is stable, 0.075 in 1973 and 0.073 in 2000, but the most profitable seasoned big firms become a bit
more profitable, and the least profitable become a bit less profitable.
The cross-sections of profitability for seasoned firms listed at least ten years (Figure 5c) show
that much of the increasing left skewness of profitability observed in Figure 5a (seasoned firms listed at
least five years) is driven by unprofitable new lists. Tightening the definition of seasoned firms –
reducing the impact of aging new lists – has little effect on the right tail of the distribution; there is little
difference between the 75th and 90th percentiles in Figures 5a and 5c. Tightening the definition does,
however, dampen the distribution’s left skewness. For example, the 10th percentile of E/A for firms listed
more than five years (Figure 5a) falls from 3.5% in 1978 to -11.4% in 1990 and -17.9% in 2000. The 10th
percentile for firms listed more than ten years (Figure 5c) falls only about half as much, from 3.6% in
1978 to -5.2% in 1990 and -9.1% in 2000.
Figure 6 shows how new lists and seasoned firms combine to produce the cross-sections of
profitability for all listed firms. From 1980 to 2000, the distribution of profitability for all listed firms
drifts down and becomes increasingly skewed left, more so than for seasoned firms but less strongly than
for new lists. This is not surprising, given the evidence on the evolution of profitability for new lists and
12
seasoned firms. Our point is that the mostly small new lists of 1980-2000 play an important role in the
evolution of the cross-section of profitability for all listed firms (the population of firms that get the
benefits of unrestricted risk sharing) both because new lists are so numerous and because aging new lists
are influential in the evolution of profitability for seasoned firms.
B. Growth Rates
There are also substantial changes in the growth characteristics of listed firms during the 1980-
2000 period of abundant new lists. Like profitability, the distribution of growth for all listed firms
(Figure 7a) becomes more disperse. While profitability becomes more left skewed, growth becomes more
right skewed. Median growth does not change much during 1973-2000, fluctuating around 10% per year
(close to the size-weighted average growth of seasoned firms in Table 2). But firms with shrinking assets
become more common. In 1973 about 10% of listed firms decrease in size from one year to the next;
after 1981, typically more than 25% shrink from one year to the next. Increasing right skewness is,
however, the obvious feature of the cross-section of growth rates. The 75th percentile of dA/A rises from
24.3% in 1973 to 42.3% in 2000; the 90th percentile rises from 43.6% to 184.2%.
Figure 7b shows that the increasing right skewness of asset growth for all listed firms is much
subdued in the cross-section of seasoned firms (listed more than five years). Thus, the more extreme
skewness observed for all listed firms is due to new lists. Indeed, to accommodate the increasing right
skewness of dA/A for new lists of the previous five years, the upper end of the scale in Figure 7c must be
stretched to 6.0 (600 percent per year), versus 2.2 for all listed firms in Figure 7a.
Figures 8a and 8b show that the cross-sections of dA/A for IPO and non-IPO new lists are
skewed to the right, but the asymmetry is more extreme for IPOs. And the right skewness of dA/A
observed for new lists of the previous five years (in Figures 8a and 8b) is dwarfed by the skewness of
growth rates in the first listed year (in Figures 9a and 9b), especially for IPOs. One quarter of the IPOs in
1999 have one-year asset growth rates that exceed 1100 percent, and ten percent of the growth rates
13
exceed 3000 percent. The 75th and 90th percentiles of one-year asset growth rates for IPOs in 2000, 682
percent and 1375 percent, are smaller, but still extraordinary.
Perhaps the extreme initial growth of IPOs is not surprising. Many firms go public because they
are in a high growth phase and have strong demands for external equity financing. Toward the end of the
sample period, many firms (especially internet related firms) go public early in their life cycles, when
they have few tangible assets. Enormous asset growth in percentage terms is not surprising from a base
close to zero. But Figures 8a and 8b show that strong right skewness characterizes cross-sections of new
list (IPO and non-IPO) growth rates for the first five listed years. And the increasing right skewness
occurs while there are fewer and fewer new lists in the extreme left tail of the size distribution (Table 1).
Moreover, Figure 8c shows that many big new lists, with assets above the NYSE median, experience
extreme growth toward the end of our sample. Each year from 1995 to 2000, one quarter of the big new
lists of the last five years have annual asset growth rates above 65% and ten percent have growth rates
above 145%. In 2000, the 10th percentile for big firms listed in the last five years is 814%.
Though right skewness is the dominant characteristic of new list growth, there is also interesting
action in the left tail of the distribution. The 10th percentile of first-year dA/A for IPOs is always positive
(Figure 9a); few IPOs shrink in their first listed year. And for IPOs, all percentiles of first-year dA/A
increase in the 1980s and 1990s; stronger first-year growth is a general characteristic of the IPOs of later
years. In contrast, though difficult to see because of the extreme scale of the graphs, after 1981 about
25% of non-IPO new lists have shrinking assets even in the listing year (Figure 9b). Moreover, after
1981 about 25% of the IPOs of the previous five years have shrinking assets (Figure 8a). And if
anything, the median and lower percentiles of asset growth for new lists (IPOs and non-IPOs) of the
previous five years decline after 1981 (Figures 8a and 8b). These results suggest that the increasingly low
and left skewed post-listing profitability of the new lists of the last 20 years eventually produces a
substantial fraction of new lists that begin to shrink soon after listing.
In sum, during 1980-2000, more and more new firms with high growth and low profitability
become viable candidates for unrestricted risk sharing via publicly held equity. Because these new firms
14
are plentiful, their characteristics eventually dominate the characteristics of listed firms (the population of
firms that get the benefits of unrestricted risk sharing). But new lists are mostly small, and the changes
they induce in the characteristics of listed firms are largely special to small firms. Profitability and
growth also become more disperse for large firms, large-firm growth becomes somewhat right skewed,
but large-firm profitability does not become noticeably left skewed. In general, the changes in growth
and profitability for large firms are dwarfed by those for small firms, especially small new lists. And with
the flood of new lists after 1979, more and more small seasoned firms are aging new lists with continuing
high growth and low profitability. In the end, then, the central role in the changing characteristics of
listed firms falls to new lists, especially small new lists.
IV. Survival Rates
Some of the changes in profitability discussed above may be a spurious result of accounting rules.
For example, the high profitability of the early sample years may be due in part to the high inflation of the
1970s and early 1980s, which causes profitability to be overstated because earnings grow with inflation
but assets are measured at historical cost. Another common story is that profitability is understated later
in the sample period because firms invest more in intangible assets like R&D and human capital, which
are expensed rather than depreciated over time. We doubt that vagaries of accounting can explain the
major changes in profitability we observe – the increasing left skewness of E/A for small firms and
especially small new lists, which is not shared by big firms. In any case, there is a simple test. If the
increasing skewness of profitability is a matter of accounting rules, it should not be associated with
changes in survival rates. But if the left skewness of profitability is real, survival rates, especially for
small firms and small new lists, are likely to decline through time.
Table 3 summarizes average survival rates, specifically, percents of firms still trading after ten
years and percents lost within ten years in mergers or through delisting for poor performance. Year-by-
year details are in Figures 10 and 11. Survival rates indeed decline through time. For seasoned firms, the
ten-year survival rate falls about 15 percentage points, from 59.5% for the 1973 cohort to 44.3% for the
15
cohort of 1991 (Figure 10a). Survival rates for new lists are close to those of seasoned firms early in the
sample period, but new list survival rates fall more through time. The ten-year new list survival rate falls
more than 25 percentage points, from 64.4% for the new lists of 1973 to 37.0% for the 1991 cohort
(Figure 10a). Though there are no clear trends after 1981, survival rates fall more after 1973 for non-IPO
new lists than for IPOs. The ten-year survival rate for IPOs falls from 56.7% for the cohort of 1973
(Figure 10b) to an average of 39.7% for the 1980-1991 cohorts (Table 3). The decline for non-IPO new
lists is from 68.7% to 30.6%. Thus, for 1980-1991 (when new lists are plentiful and their profitability
declines, becomes more disperse, and more left skewed), only about 40% of IPOs and 31% of non-IPO
new lists survive more than ten years.
Firms disappear from CRSP in mergers or because poor performance causes them to be delisted.
Merger targets include strong and weak firms, so takeovers are ambiguous signals about performance.
There is, however, no ambiguity about the poor health of firms delisted for cause. And, in line with the
profitability evidence, new lists are more likely to be delisted for poor performance than seasoned firms.
Figure 11a shows that the rate at which seasoned firms are delisted for poor performance
increases through time; 13.5% of the seasoned firms of 1973 are delisted within ten years (Figure 11a),
and the average ten-year drop rate rises to 18.4% for the seasoned cohorts of 1980-1991 (Table 3). The
drop rates for new lists, which are always above those for seasoned firms, rise sharply from 1973 to
roughly 1980. Thereafter, the new list drop rates are too variable to identify a clear trend. The ten-year
drop rate for the new lists of 1973, 14.4%, is a bit higher than for seasoned firms, but the average for the
cohorts of 1980-1991 is about twice as high, 40.2%. Thus, about one in five of the seasoned firms of
1980-1991 is dropped within ten years for poor performance, versus two in five new lists. The 1973 IPOs
and non-IPO new lists (Figure 11b) have similar ten-year drop rates, 13.3% and 15.0%, but the rate for
non-IPO new lists rises more thereafter, averaging 47.5% for 1980-1991 cohorts, versus 33.5% for IPOs
16
(Table 3). Thus, almost half of the non-IPO new lists of 1980-1991 are dropped for poor performance
within ten years of listing, versus (a still impressive) one-third of IPOs.2
The profitability of big seasoned firms becomes only a bit more disperse during the 1980s and
1990s, and it does not show the left skewness observed for small seasoned firms (Figure 5b). Not
surprisingly, then, the (always low) ten-year drop rate for big seasoned firms rises only slightly, from
1.7% for the cohorts of 1973-1979 to 2.1% for 1980-1991 (Table 3). The profitability of big new lists
(Figure 4c) is more disperse than that of big seasoned firms but much less disperse and left skewed than
that of all new lists (Figure 4a) and, by implication, small new lists. Thus, it is also not surprising that
ten-year drop rates for big new lists, which average 7.1% for 1973-1979 and 6.7% for 1980-1991, are
higher than the rates for big seasoned firms but much lower than for small new lists. Mergers are the
main exit route for big firms; 27.4% of the 1973-1991 cohorts of big seasoned firms and 36.4% of big
new lists are absorbed within ten years in mergers.
In sum, the evidence on performance delistings conforms nicely with the profitability results.
Specifically, with the surge in new lists after 1979, the cross-section of profitability for listed firms drifts
down and becomes progressively more left skewed. These changes in profitability are mostly due to
small firms and they are stronger for new lists than for seasoned firms. Likewise, performance delistings
increase after 1979, the increase is primarily due to small firms, and it is larger for new lists than for
seasoned firms.
V. Profitability for Outcome Groups of New Lists
The analysis above presumes that firms delisted for poor performance are from the fattening left
tail of the cross-section of profitability. Table 4 provides evidence. The table shows the average
profitability and growth of new lists and seasoned firms for one, three, and five years before each of the
possible outcomes, survival, merger, or performance delisting. For example, current average profitability
2 Some readers have asked how new lists fare in the difficult markets of 2000 and 2001. The one-year delist rate for the cohort of 2000, 3.0%, and the two-year rate for the 1999 cohort, 9.2%, are not extraordinary. They are lower, for example, than five of the ten one-year rates and eight of the two-year rates for the cohorts of 1981-1990.
17
is shown for portfolios of firms listed within the previous five years that delist for cause within the next
one, three, and five years. Three merger portfolios are defined in the same way. And there are three
complement portfolios that include new lists of the previous five years that survive at least through the
next one, three, and five years. Table 4 also shows average profitability for seasoned firms (listed at least
five years) that merge within, delist within, or survive beyond the next one to five years.
The general decline in profitability from 1973-1979 to 1990-2000 hits different groups of firms at
different times and to different extents. In the 1970s and 1980s, survival implies strong average profits
for seasoned firms. IPO survivors are even more profitable and grow about three times faster than
seasoned survivors. Seasoned survivors share the general decline in profitability from 1980-1989 to
1990-2000, but the decline is stronger for IPO survivors. In the 1990s, when E/A averages 6.1% to 6.3%
for seasoned survivors, it is 6.0% for IPOs that survive beyond the next five years, and only 4.6% for
those that survive beyond one year. The decline in profitability shows up earlier among non-IPO new
lists that survive. For 1973-1979, the average profitability of non-IPO new list survivors is similar to that
of seasoned survivors. By the 1980s (and in 1990s), the average profitability of non-IPO new list
survivors – while still respectable – is 1.5% to 2.0% lower than for seasoned survivors. Overall, however,
survivors among new lists and seasoned firms tend to be profitable with strong growth, which is not
surprising. Survivors are, however, declining proportions of all seasoned firms and new lists.
The evidence on the profitability and growth of firms lost in mergers is more interesting and
novel. Merger rates do not trend much during the sample period. During 1973-1991, on average about
one in three seasoned firms and one in four new lists are absorbed in mergers within ten years (Table 3).
But the characteristics of merged firms change. The seasoned firms of 1973-1979 lost in mergers are
about as profitable and grow nearly as fast as seasoned survivors (Table 4). But in the 1980s and 1990s,
the average profitability and growth of merged seasoned firms fall relative to seasoned survivors. Thus,
through time the merger arrow is aimed more at mediocre seasoned firms. (This is a likely explanation for
the low pre-announcement stock returns of merged firms (Mitchell and Stafford (2000)).)
18
The picture for IPOs lost in mergers is a bit different. In the 1980s and 1990s, their average
profitability and growth for years far in advance of merger are high, like those of IPOs that survive.
Average profitability deteriorates as merger approaches, but growth remains strong. These results suggest
that merged IPOs tend to be firms that continue to grow despite poor returns on investment. Non-IPO
new lists lost in mergers also experience declining profitability in the years preceding merger.
As expected, the biggest effects of the downward drift and increasing left skewness of
profitability after 1979 show up in the expanding set of firms delisted for poor performance. They have
terrible earnings for five years before delisting, and profitability deteriorates as delisting approaches
(Table 4). New lists (IPOs and non-IPO) delisted for poor performance are less profitable than delisted
seasoned firms. Consistent with the increasing left skewness of profitability, the poor profitability of
delisted firms (seasoned and new lists) becomes more extreme from 1980-1989 to 1990-2000. And the
delisted firms of 1990-2000 have negative and declining profitability for five years before delisting.
The average growth of firms delisted for poor performance is interesting. Delisted seasoned
firms have low growth in the years preceding delisting and shrinking assets in the delisting year (Table 4).
More surprising, but in line with the results for merged new lists, the new lists of 1980-2000 delisted for
poor performance on average grow strongly in the years preceding delisting, despite typically negative
profitability; they do not begin to shrink until the delisting year (if then). Thus, the high delist rates of
new lists tend to be the result of growth un-rewarded by earnings. These results suggest that new lists
delisted for poor performance tend to be firms that (at least on an ex post basis) have wasted resources on
unprofitable investments. And the suggestion is stronger than for merged new lists.
VI. Conclusions
After 1979, the rate at which new firms are listed on the major U.S. stock exchanges jumps from
about 140 to near 600 per year. The profile of new lists also changes. Profitability and growth become
progressively more disperse, profitability becomes more left skewed, and growth becomes more right
skewed. The result is a sharp decline in new list survival rates due to delistings for poor performance.
19
The flood of new lists with low long-term profitability and high growth eventually causes seasoned firms
to acquire subdued versions of the profitability and growth characteristics of new lists, with a
corresponding decline in survival rates.
The dramatic changes in the profitability and growth characteristics of listed firms during 1980-
2000 are largely due to small firms. The changes are nevertheless important for understanding the market
for listed firms, in particular, the kind of firms that are viable candidates for public equity financing. Our
results say that changes in demand or supply conditions lead to increased sharing of the risks of firms
with high growth and low profitability, a combination that produces a large dose of unhappy eventual
outcomes. And these changes occur slowly over the post-1979 period. They are not special to the high-
tech and internet-related new lists of last few years.
The broadening of the kinds of firms publicly traded during 1980-2000 may be due to changes in
supply conditions, such as lower monitoring costs and reductions in other costs of holding and trading
small, relatively unprofitable, but rapidly growing firms. If changes in supply conditions are responsible,
and if new firms are properly priced, expanding the set of firms eligible for public trading enhances the
efficiency of the economy’s aggregate investment and risk sharing.
There is, of course, controversy on the pricing issue. Behavioralists, like Ritter (1991) and
Loughran and Ritter (1995), argue that IPOs are overpriced and yield abnormally low post-listing returns;
in effect, there is too much investment in IPOs and their activities. Others, like Fama (1998) and Brav,
Geczy, and Gompers (2000), argue that the way returns are risk-adjusted has a big effect on inferences
about IPO pricing, rendering all inferences shaky. In a provocative recent paper, Schultz (2002) argues
that because IPOs bunch in periods following high returns, the average return on the typical IPO is likely
to appear low, even if IPOs are properly priced. Suffice it to say that the pricing issue remains open.
Is the broadening of the types of publicly traded firms during 1980-2000 due to demand or supply
conditions? This is a big question, and we only offer some possibilities. There are many changes in
corporate governance in the 1980s and 1990s, perhaps including improvements in monitoring technology.
The breakdown of fixed commissions and the introduction of NASDAQ and its automated quotation
20
system reduce the costs of trading and so increase the liquidity of traded firms. General increases in
liquidity and the efficiency of monitoring (supply conditions) are likely to expand the class of firms that
are viable candidates for public equity financing.
There is, however, reason to judge that changes in demand also play an important role. The
broadening of the class of firms publicly traded during 1980-2000 is not toward smaller size. If anything,
the average size of newly public firms increases, and there is a general thinning of the extreme left tail of
the size distribution of new lists (Table 1). Rather the broadening is toward firms with lower initial
profitability and higher growth. And the key is lower profitability; these are probably firms that in the
past would be judged negative net present value investments and so not viable candidates for public
equity financing. What changes to give them positive value? Fama and French (2002) argue that the rise
in price-earnings ratios during 1980-2000 is largely due to declining expected stock returns, or
equivalently, a lower cost of equity capital. With a lower cost of capital, less profitable firms become
positive net present value projects and viable candidates for public equity financing.
Finally, our sample period (1973-2000) is relatively short, and it is reasonable to ask whether
there are similar “hot” markets for new lists with similar growth and profitability characteristics in earlier
periods. Other evidence suggests that this is not the case. Gompers and Lerner (2001) study the IPOs of
the 1935-1972 period preceding NASDAQ. Their sample is fairly complete; it is not restricted to IPOs
listed on major exchanges. They find that from 1935 to 1945, there are few IPOs (typically less than ten
per year). Prior to 1959, there are no hot markets; the largest number of IPOs in any year is 51. From
1959 to 1962 there is a spurt of IPOs, ranging from 122 in 1959 to 321 in 1961. There is a bigger surge
from 1968 to 1972, ranging from 204 IPOs in 1971 to 683 in 1969, numbers more like those of the
sustained hot market of the last 20 years of our sample.
Most of the IPOs of the pre-NASDAQ period are not on Compustat in their IPO year, so we do
not have information about initial profitability and growth. But the firms on NASDAQ by the end of the
CRSP startup period (April 1973), which we classify as seasoned, and the non-IPO new lists of the early
NASDAQ years, are probably heavy with the surviving IPOs of the 1968-1972 hot market. In the early
21
years of NASDAQ, seasoned small firms and non-IPO new lists tend to be more profitable than all listed
firms (Table 2 and Figure 3), and the profitability and growth of seasoned small firms and non-IPO new
lists do not show the high dispersion and skewness that evolve over later years (Figures 4 to 9). Indeed
the fact that the profitability and growth characteristics of new lists (IPOs and non-IPO) evolve slowly
during the rather continuous hot new list market of 1980-2000 suggests that we are indeed observing
changes in the kinds of firms that are viable candidates for public equity financing.
22
References
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Campbell John Y., Martin Lettau, Burton G. Malkiel, and Yexiao Xu, 2001, Have individual stocks
become more volatile? An empirical investigation of idiosyncratic risk, Journal of Finance 56, 1-43.
Fama, Eugene F., 1998, Market Efficiency, Long-Term Returns, and Behavioral Finance, Journal of
Financial Economics, 49, 283-306. Fama, Eugene F., and Kenneth R. French, 1995, Size and book-to-market factors in earnings and returns,
Journal of Finance 50, 131-155. Fama, Eugene F., and Kenneth R. French, 2001, Disappearing dividends: changing firm characteristics or
lower propensity to pay, Journal of Financial Economics 60, 3-43. Fama, Eugene F., and Kenneth R. French, 2002, The equity premium, Journal of Finance 57, 637-659. Gompers, Paul A., and Lerner Josh, 2001, The really long-run performance of initial public offerings: The
pre-NASDAQ evidence, Working paper 8505, National Bureau of Economic Research. Jain, Bharat A., and Omesh Kini, 1994, The post-issue operating performance of IPO firms, Journal of
Finance 49 (December), 1699-1726. Loughran, Tim, and Jay R. Ritter, 1995, The new issues puzzle, Journal of Finance 50, 23-51. Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah, 1997, Ownership and operating performance
of companies that go public, Journal of Financial Economics 44, 281-307. Mitchell, Mark L., and Erik Stafford, 2000, Managerial decisions and long-term stock price performance,
Journal of Business 73, 287-329. Ritter, Jay R., 1991, The long-run performance of initial public offerings, Journal of Finance 46, 3-27. Schultz, Paul H., 2002, Pseudo market timing and the long-run performance of IPOs, Working paper,
Notre Dame.
Table 1 -- Counts and Size Statistics for New Lists
Firms are defined as new lists when they are first added to the CRSP database. Firms trading on NASDAQ by April 1973 are not new lists. A new list is defined as an IPO if it is in the IPO sample provided by Jay Ritter (an updated version of that in Loughran and Ritter (1995)) and its CRSP listing month is no more than three months before and ten months after its reported IPO. Firms is the average number of new lists, IPOs, or non-IPO new lists in the indicated period. A firm’s NYSE and local ME percentiles measure its market equity relative to firms on the NYSE and its listing exchange in the month it is listed. The percent of names for year t is the number of newly listed firms divided by the monthly average of the total number of listed firms (x 100). The percent of ME for year t is the sum of the initial market equity of newly listed firms divided by the monthly average of the total market equity of all listed firms (x 100). The results for each period are simple averages of annual values. We use only firms with CRSP share codes of 10 and 11 (ordinary shares). All New Lists IPOs Non-IPO New Lists Ave Percentile Percent of Ave Percentile Percent of Ave Percentile Percent of Firms NYSE Local Names ME Firms NYSE Local Names ME Firms NYSE Local Names ME 1973-2000 486 12.1 50.3 8.26 1.66 287 15.1 57.9 4.72 1.13 200 8.5 43.1 3.53 0.53 1980-2000 598 13.1 52.1 9.95 2.08 372 15.8 57.9 6.09 1.46 226 8.5 43.4 3.86 0.62 1973-1979 149 9.3 45.2 3.18 0.39 30 13.2 57.8 0.64 0.14 119 8.7 42.2 2.53 0.26 1980-1989 573 8.2 48.3 10.38 1.95 306 10.6 55.3 5.48 1.10 267 5.9 41.3 4.90 0.85 1990-2000 622 17.5 55.5 9.56 2.20 432 20.4 60.3 6.63 1.79 189 10.9 45.2 2.93 0.40 Percent of Names in NYSE Percentile Range Percent of Names in Local Exchange Percentile Range ≤ 0 ≤ 5 ≤ 10 ≤ 20 ≤ 30 ≤ 40 ≤ 50 ≤ 5 ≤ 10 ≤ 20 ≤ 30 ≤ 40 ≤ 50 All New Lists 1973-1979 12.1 67.0 75.2 85.3 89.7 92.9 96.5 4.4 9.8 22.1 34.4 47.0 58.8 1980-1989 8.5 66.0 78.1 88.5 93.2 95.9 97.7 1.0 3.5 13.1 26.8 41.4 55.4 1990-2000 0.0 33.2 50.0 70.1 81.2 88.0 92.4 0.7 2.3 9.4 20.1 31.5 42.0 IPOs 1973-1979 5.9 48.5 59.4 78.0 86.9 90.4 95.9 2.3 2.8 10.7 18.9 29.9 38.4 1980-1989 3.4 55.6 69.3 83.6 90.6 94.5 96.9 0.1 1.1 6.3 16.8 30.0 44.5 1990-2000 0.1 24.5 40.1 63.4 76.9 85.4 91.0 0.2 1.4 6.6 14.7 24.5 33.7 New Lists that are Not IPOs 1973-1979 13.7 71.0 78.6 86.2 89.4 92.8 96.4 4.9 11.5 25.1 38.7 51.4 63.8 1980-1989 13.2 76.5 86.5 93.3 95.7 97.3 98.3 1.9 5.8 20.0 37.3 53.1 66.6 1990-2000 0.0 51.9 71.1 85.3 91.1 94.3 96.2 1.4 4.2 15.2 31.4 46.6 60.2
Table 2 – Average Percent Profitability (E/A) and Percent Growth in Assets (dA/A) for Seasoned Firms, IPOs, and Non-IPO New Lists Firms are defined as new lists when they are first added to the CRSP database. Firms trading on NASDAQ by April 1973 are not new lists. A new list is defined as an IPO if it is in the IPO sample provided by Jay Ritter (an updated version of that in Loughran and Ritter (1995)) and its CRSP listing month is no more than three months before and ten months after its reported IPO. The IPO and non-IPO new list results are for the fiscal year that includes the listing month (year 1) and for the next four years (2-5). The year 1 results for Seasoned firms (listed at least five years) in year t are for all seasoned firms with the necessary CRSP and Compustat data in year t. The results for forward years 2-5 are for firms with data in year t and in year t+1, t+2, t+3, or t+4. Firms is the average number of new lists or seasoned firms with the necessary CRSP and Compustat data in year t. The percent growth in assets for year t+τ, dA/A, is 100 x (At+τ-At+τ-1)/At+τ-1. Profitability, E/A, is earnings before interest divided by assets, in percent. We calculate annual ratios as the aggregate value of the numerator divided by the aggregate value of the denominator. The results for each period are simple averages of the annual ratios. We use only non-financial firms (we exclude SIC codes 6000-6999) with CRSP share codes of 10 and 11 (ordinary shares). Average Profitability, E/A Average Growth in Assets, dA/A Forward Year Forward Year Firms 1 2 3 4 5 1 2 3 4 5 Seasoned 1973-2000 2824 7.5 7.4 7.4 7.3 7.2 10.1 9.9 9.7 9.8 10.0 1980-2000 2812 7.3 7.1 7.0 6.9 6.8 9.5 9.3 9.1 9.2 9.6 1973-1979 2858 8.0 8.2 8.4 8.4 8.4 11.7 11.6 11.3 11.6 11.1 1980-1989 2631 8.4 8.1 7.6 7.2 6.9 10.0 9.7 8.8 8.5 8.9 1990-2000 2977 6.3 6.2 6.3 6.5 6.6 9.1 9.0 9.4 10.0 10.5 IPOs 1973-2000 209 8.2 6.9 6.1 5.0 5.7 78.7 39.8 32.8 29.2 20.0 1980-2000 277 6.9 5.9 4.9 4.4 5.1 58.9 33.2 32.6 23.2 18.9 1973-1979 5 12.0 10.0 9.1 6.4 7.3 138.1 58.5 33.1 44.7 22.8 1980-1989 180 10.5 9.0 7.1 6.2 5.9 62.4 32.9 27.6 21.1 15.1 1990-2000 366 3.7 2.7 2.5 2.2 3.8 55.7 33.5 38.2 25.8 24.3 Non-IPO New Lists 1973-2000 71 4.4 5.7 5.9 6.8 5.6 19.9 19.3 16.4 21.4 17.6 1980-2000 83 2.8 4.8 4.8 6.5 4.7 16.6 15.5 15.3 21.1 16.7 1973-1979 34 9.2 8.2 8.6 7.8 7.7 29.7 30.2 19.4 22.1 19.8 1980-1989 93 4.9 6.2 5.1 5.8 4.4 18.8 16.7 13.1 25.4 9.6 1990-2000 74 0.9 3.5 4.5 7.4 5.1 14.6 14.2 17.8 15.8 27.0
Table 3 – Average Percent of Firms that Survive for Ten Years, or that Merge or Delist for Cause within Ten Years Firms are defined as new lists when they are first added to the CRSP database. Firms trading on NASDAQ by April 1973 are not new lists. A new list is defined as an IPO if it is in the IPO sample provided by Jay Ritter (an updated version of that in Loughran and Ritter (1995)) and its CRSP listing month is no more than three months before and ten months after its reported IPO. Seasoned firms are those listed at least five years. The year t percent of new lists that survive is the fraction of firms listed in year t that continue to trade in t+10. The year t percent of new lists that merge (CRSP delist codes 200-399) or delist for cause (delist codes of 400 and above) is the fraction of firms listed in year t that merge or delist within ten years. The year t percents of firms in other categories that survive, merge, or delist for cause are defined analogously. The results for each period are simple averages of annual percents. The Small and Big size groups include firms with assets below or above the median NYSE firm. We use only firms with CRSP share codes of 10 and 11 (ordinary shares). All Firms Seasoned Firms All New Lists IPOs Non-IPO New Lists All Small Big All Small Big All Small Big All Small Big All Small Big Survive 73-91 47.6 43.4 69.9 51.5 46.5 70.7 40.1 39.6 56.7 42.3 41.5 62.7 37.3 36.9 64.0 73-79 53.5 49.3 72.0 54.4 49.9 72.5 48.2 47.9 54.8 46.8 45.3 70.0 48.7 48.7 69.4 80-91 44.1 40.0 68.6 49.9 44.5 69.6 35.4 34.8 57.8 39.7 39.2 59.6 30.6 30.1 61.3 Merged 73-91 31.4 32.1 28.1 32.7 33.9 27.4 25.0 24.8 36.4 28.7 29.0 26.6 22.8 22.5 32.3 73-79 33.6 35.2 26.3 33.9 36.1 25.8 26.1 26.0 38.1 32.0 33.2 20.0 24.5 24.1 27.8 80-91 30.1 30.3 29.1 31.8 32.7 28.3 24.4 24.1 35.4 26.8 26.5 29.4 21.9 21.5 34.5 Delisted for Cause 73-91 21.0 24.5 2.0 15.9 19.3 1.9 34.9 35.6 6.9 29.0 29.6 10.7 39.9 40.6 3.7 73-79 12.9 15.4 1.7 11.6 14.0 1.7 25.7 26.1 7.1 21.2 21.4 10.0 26.8 27.2 2.8 80-91 25.8 29.7 2.2 18.4 22.9 2.1 40.2 41.1 6.7 33.5 34.3 11.0 47.5 48.4 4.2
Table 4 – Average Profitability (E/A) and Growth (dAt/At) for New Lists and Seasoned Firms that Survive, Merge, or Delist for Cause Profitability, E/A, is earnings before interest divided by assets, in percent. Growth, dA/A = 100 x (At – At-1)/At-1, is the percent change in assets. We calculate annual ratios as the aggregate value of the numerator divided by the aggregate value of the denominator. The results for each period are simple averages of the annual ratios. A firm is defined as a new list for the first five years it is in the CRSP database. Thus, year t profitability for new lists that survive one year describes firms that were listed in the last five years and that continue to trade in the year after t. Similarly, new lists that merge (CRSP delist codes 200-399) or are delisted for cause (delist codes of 400 and above) in the next N (1-5) years include only firms listed in the last five years that are merged or delisted within the next τ years. Firms is the average number of new lists or firms that survive at least five years, or that merge or delist for cause within five years. We use only non-financial firms (we exclude SIC codes 6000-6999) with CRSP share codes of 10 and 11 (ordinary shares). Seasoned Firms IPOs Non-IPO New Lists Firms 5 3 1 Firms 5 3 1 Firms 5 3 1 E/A Firms that Survive at Least another N x 12 Months 73-79 2292 8.1 8.1 8.1 9 12.0 11.9 11.8 76 7.3 7.4 7.5 80-89 1925 8.5 8.4 8.4 421 9.4 9.2 8.9 210 6.7 6.7 6.6 90-00 2098 6.1 6.3 6.2 748 6.0 5.4 4.6 181 4.7 4.8 4.4 Firms that Merge within N x 12 Months 73-79 452 7.9 8.1 8.1 1 13.8 13.3 0.0 10 9.4 10.5 6.6 80-89 490 7.7 7.7 7.5 88 8.7 8.2 5.4 36 7.3 6.2 4.2 90-00 489 5.0 5.0 4.4 219 6.2 5.3 2.3 36 2.8 2.6 0.5 Firms that Delist for Cause within N x 12 Months 73-79 114 4.8 3.5 0.7 3 -45.4 -29.8 -145.9 7 7.4 2.2 -34.1 80-89 215 2.9 2.0 -3.9 101 1.5 -0.2 -25.2 82 -0.9 -3.1 -6.6 90-00 307 -1.6 -4.2 -10.4 158 -1.2 -6.2 -34.1 89 -6.2 -12.4 -23.4 dA/A Firms that Survive at Least another N x 12 Months 73-79 2292 11.8 11.8 11.7 9 24.4 24.1 24.1 76 23.0 23.5 24.5 80-89 1925 10.2 10.2 10.1 421 39.2 38.9 38.5 210 16.8 17.5 17.4 90-00 2098 5.9 7.0 8.1 748 23.1 26.9 29.3 181 7.3 8.8 13.1 Firms that Merge within N x 12 Months 73-79 452 10.6 10.3 8.4 1 38.4 38.2 0.0 10 32.6 31.8 21.6 80-89 490 8.0 7.2 4.9 88 35.2 33.3 46.4 36 18.2 11.8 6.6 90-00 489 6.3 4.6 4.9 219 25.2 20.4 17.7 36 7.0 6.2 28.5 Firms that Delist for Cause within N x 12 Months 73-79 114 7.0 3.2 -1.7 3 -27.9 48.8 -67.7 7 30.6 69.4 -9.0 80-89 215 8.2 11.0 -6.4 101 56.8 70.8 27.0 82 25.2 24.3 -3.0 90-00 307 2.0 3.7 -7.4 158 20.2 22.3 -14.3 89 11.3 17.9 12.5
Figure 1- Number of New Lists
0
200
400
600
800
1000
1200
1973 1978 1983 1988 1993 1998
Year
Firm
s New ListsIPOsNon-IPOs
Figure 2a - Profitability in Year 1 for New Lists and Seasoned Firms
-10
-5
0
5
10
15
20
1973 1978 1983 1988 1993 1998
Year
E/A
Seasoned FirmsIPOsNon-IPO New Lists
Figure 2b - Profitability in Year 3 for New Lists and Seasoned Firms
-10
-5
0
5
10
15
20
1973 1978 1983 1988 1993 1998
Year
E/A
Seasoned FirmsIPOsNon-IPO New Lists
Figure 2c - Profitability in Year 5 for New Lists and Seasoned Firms
-10
-5
0
5
10
15
20
1973 1978 1983 1988 1993
Year
E/A
Seasoned FirmsIPOsNon-IPO New Lists
Figure 3 - Profitability for All Big Firms, and All, Seasoned (> 5 Years), and Newly Listed Small Firms (≤ 5 Years)
-12
-8
-4
0
4
8
12
1973 1978 1983 1988 1993 1998
Year
E/A
All Big FirmsAll Small FirmsSeasoned SmallNewly Listed Small
Figure 4a - Percentiles of Year 1 Profitability for New Lists
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
1973 1978 1983 1988 1993 1998
Year
E/A
10%
25%
50%
75%
90%
Figure 4b - Percentiles of E/A for New Lists of the Last Five Years
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
1973 1978 1983 1988 1993 1998
Year
E/A
90%
75%
50%
25%
10%
Figure 4c - Percentiles of E/A for Big New Lists of the Last Five Years
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
1973 1978 1983 1988 1993 1998
Year
E/A
90%75%
50%
25%
10%
Figure 5a - Percentiles of Profitability for All Seasoned (> 5 Years) Firms
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
1973 1978 1983 1988 1993 1998
Year
E/A
10%
25%
50%
75%
90%
Figure 5b - Percentiles of Profitability for Big Seasoned (> 5 Years) Firms
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
1973 1978 1983 1988 1993 1998
Year
E/A
10%25%50%75%90%
Figure 5c - Percentiles of Profitability for All Seasoned (> 10 Years) Firms
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
1973 1978 1983 1988 1993 1998
Year
E/A
10%
25%
50%
75%90%
Figure 6 - Percentiles of Profitability for All Listed Firms
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
1973 1978 1983 1988 1993 1998
Year
E/A
10%
25%
50%
75%
90%
Figure 7a - Percentiles of Growth for All Listed Firms
-0.3
0.2
0.7
1.2
1.7
2.2
1973 1978 1983 1988 1993 1998
Year
dA/A
10%
25%
50%
75%
90%
Figure 7b - Percentiles of Growth for All Seasoned (> 5 Years) Firms
-0.3
0.2
0.7
1.2
1.7
2.2
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%50%
75%
90%
Figure 7c - Percentiles of Growth for All New Lists of the Last Five Years
-1
0
1
2
3
4
5
6
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%50%
75%
90%
Figure 8a - Percentiles of Growth for IPOs of the Last Five Years
-1
0
1
2
3
4
5
6
1973 1978 1983 1988 1993 1998
Year
dA/A
10%
25%50%
75%
90%
Figure 8b - Percentiles of Growth for Non-IPO New Lists of the Last Five Years
-1
0
1
2
3
4
5
6
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%50%
75%
90%
Figure 8c - Percentiles of Growth for Big New Lists of the Last Five Years
-1
0
1
2
3
4
5
6
7
8
9
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%50%
75%
90%
Figure 9a - Percentiles of Year 1 (Listing Year) Growth for IPOs
-2
0
2
4
6
8
10
12
14
16
18
20
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%
50%
75%
90%
Figure 9b - Percentiles of Year 1 (Listing Year) Growth for Non-IPO New Lists
-2
0
2
4
6
8
10
12
14
16
18
20
1973 1978 1983 1988 1993 1998
Year
dA/A
10%25%
50%
75%
90%
Figure 10a - Percent of New Lists and Seasoned Firms Trading Ten Years Later
20
30
40
50
60
70
80
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991
Year
Perc
ent Seasoned
New Lists
Figure 10b - Percent of IPOs and Non-IPO New Lists Trading Ten Years Later
20
30
40
50
60
70
80
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991
Year
Perc
ent
IPOs
Non-IPOs
Figure 11a - Percent of New Lists and Seasoned Firms Dropped Within Ten Years
0
10
20
30
40
50
60
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991
Year
Perc
ent
New Lists
Seasoned