Is there an optimal number of public companies? (Part 1)
Dr. Mikhail Pevzner takes a cost–benefit perspective to the question of more IPOs and capital formation, regulation, and investor welfare.
This is a guest article by Dr. Mikhail Pevzner, my friend and a research colleague who is a Professor of Accounting at the University of Baltimore’s Merrick School of Business. He teaches financial accounting, auditing, financial statement analysis, business valuation and business economics. He is also an Adjunct Professor of Finance at Georgetown University’s McDonough School of Business where he teaches financial regulation, valuation and corporate finance. Since obtaining his PhD at Washington University in St. Louis in 2007, Dr. Pevzner has published over 40 original research and policy articles in financial accounting, auditing, and corporate finance. He has also served as a visiting economist at the U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority where he worked on economic analyses of rule-makings related to auditors, financial accounting disclosures, broker/dealers and investment advisors. Dr. Pevzner also works as a litigation economics expert specializing in business and personal damages cases. More about his work can be found at https://mikhailpevzner.com/ and on LinkedIn at https://www.linkedin.com/in/mikhail-pevzner-07604a1/
This is Part 1 of 2 coming later this week.
Recent policy discussions have revived a familiar concern: the decline in the number of publicly traded companies in the United States. The current Chairman of the Securities and Exchange Commission, Paul Atkins, has framed this decline as a structural problem and has suggested that policy should aim to “make IPOs great again.”[1] The premise is straightforward: if more companies are public, Main Street investors will have more opportunities to participate in economic growth, particularly in earlier-stage firms where upside potential may be significant.[2]
This white paper takes a more systematic and more economically-driven view. The question is not whether more public companies are inherently good or bad. The question is whether there exists an optimal number of public companies from a societal perspective—and if so, which economic trade-offs determine that optimum. The analysis is informed by economic theory, experience with regulatory rule-making, and an attempt of a realistic appraisal of the current state of the US capital markets.
I. Public Versus Private: What Actually Changes?
All businesses begin as small private enterprises. Capital is raised through personal savings, bank loans, friends and family, venture capital, private equity, private credit, or other private channels. Ownership in private firms is typically highly concentrated. In the extreme case of a sole proprietorship, ownership and control rests with one individual. Even in more complex private structures, ownership remains limited, control is concentrated, and shares are not freely tradable on public exchanges.[3]
Under SEC rules, a firm remains private so long as ownership does not become widely dispersed beyond prescribed thresholds and its securities are not publicly traded. Private shares can change hands, but only within regulatory limits.[4]
Becoming public fundamentally changes two things. First, ownership becomes widely dispersed. Second, shares become tradable on an exchange. The original owners either partially or fully sell equity to investors who are generally not involved in management. In doing so, founders relinquish control over who owns the company’s stock. Over time, as firms grow and enter indices such as the Russell 1000 or the S&P 500, ownership increasingly shifts toward large passive institutional investors—mutual funds, pension funds, and index funds.
Importantly, public status exists along a continuum. Some public companies are “controlled companies” where over 50% of the voting power is held by an individual, a group or another company.[5] They are not required to comply with the NYSE requirements to maintain a majority of independent directors on their board, an independent nominating/corporate governance committee, and an independent compensation committee.[6] Some public companies also adopt dual-class structures, as Alphabet, Berkshire Hathaway[7] did, allowing founders to retain disproportionate voting control despite public listing, in particular with respect to anti-takeover provisions, which is widely viewed as detrimental to minority shareholders.[8] Indeed, dual-ownership firms account for 78% of the total market cap of the controlled firms.[9] Thus, “public” is not a binary concept; degrees of control and dispersion vary.
From a policy perspective, the critical question is not simply whether firms are public or private, but what form of ownership dispersion and control society should encourage, and under what circumstances.
II. Economic Neutrality and Organizational Form
In finance theory, Modigliani–Miller theorem holds that capital structure is irrelevant to firm value in frictionless markets. That is, whether a firm finances itself with debt or equity does not change its fundamental value. By analogy, one might ask: should it matter whether ownership is public or private? In other words, if the form of the ownership contract (debt or equity) should matter for the firm value, why should it matter who holds that contract as long as managers strive to maximize shareholder value?
In practice, of course we all understand it does matter because markets are not frictionless. There are costs and benefits associated with public status.[10] Firms rationally weigh those trade-offs. They do not go public arbitrarily. An IPO is fundamentally a sale of ownership interests. Someone must be willing to buy.
When founders go public, they give up control, either fully or partially. This creates a fundamental conflict of separation of ownership and control, i.e. conflict of interests between firm managers (e.g. externally hired CEOs) and public shareholders who depend on information from the managers and corporate boards as monitors of managerial behavior.[11]
The decision to give up control therefore depends in part on how valuable control is to them. If private capital markets are deep and accessible—as they are today—founders may have little incentive to list publicly unless the marginal benefit exceeds the cost. One of the most famous of these cases was Google’s founders’ decision to maintain voting control over Google—now Alphabet—through dual ownership structure. Indeed, in the 2004 Google Registration statement, Sergei Brin and Larry Page wrote to their shareholders as follows:
“Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Google users. But the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have implemented a corporate structure that is designed to protect Google’s ability to innovate and retain its most distinctive characteristics.
We are confident that, in the long run, this will benefit Google and its shareholders, old and new. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Google and are reading this letter”.[12]
This passage remains poignant. Alphabet has done remarkably well since going public and today is one of the leading American companies. Was that in part because its founders went public “with strings attached” because Brin and Page recognized that being “classically” public comes with serious potential costs. Indeed, in the same letter they emphasized:
“As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.”
In Warren Buffett’s words:
“We won’t ‘smooth’ quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you. If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view.” (emphasis added).
In other words, Brin and Page were basically saying to their potential public shareholders: we’d love to have your money, but you have to listen to us. We know best. This is in contract to Berkshire Hathaway’s dual ownership structure where the two-tiered ownership structure was created not to preserve control but to increase access to cheaper share class for retail investors.[13] Recent research suggests that the average IPO between 2015 and 2024 adopted dual ownership structure allowing “controllers” to “control voting outcomes while holding only a minority—or even a small minority—of the equity capital”. This was particularly pronounced among tech IPOs in 2021 whereby 46% of such firms adopted dual ownership structure then.[14]
So, this raises a question of whether the whole drive for more IPOs is built on the outdated concept of public ownership, as IPOs of today are increasingly not like IPOs we were used to 25 years ago when the number of public listings was double that of today[15] because the founders of today’s IPOs—in particular in tech market—do not seem to desire to part with control? This is important to consider because it creates an additional layer of conflict between corporate insiders and minority shareholders, which finance literature has recognized for a long time in addition to the classic “separation of ownership and control” conflict.[16] In other words, given the increasing presence of this conflict, will having more future IPOs necessarily increase retail minority shareholders’ wealth creation rather, since corporate controllers are more likely to have much greater pathways to expropriation of this wealth through controlling or dual ownership that is becoming much more in vogue?
III. The Social Objective: Wealth Creation and Risk
From a societal perspective, firms going public serve several broad objectives. First, some argue that more extensive financial development through public markets facilitates capital formation by allowing companies to raise funds from a much wider pool of investors, thereby supporting economic growth through investment and innovation (Levine, 1997; Rajan & Zingales, 1998[17]). Second, public ownership enables risk sharing across a broader set of investors through liquid trading markets that allow investors to diversify their portfolios (Levine, 1991[18]). Third, beyond risk sharing and diversification, public ownership democratizes participation in the stock market by extending investment opportunities beyond wealthier accredited investors who typically have access to private markets and have better information (Piketty, 2014[19]). Achieving the latter two objectives should theoretically lead to broader wealth creation across a larger share of society (Levine, 1997).
The objective of broader public ownership most relevant to this article is wealth creation across broader swaths of the population. Indeed, wealth creation appears to be one of the primary reasons for the current push for more public companies listed in the US as well as expanding unaccredited investor access to privately-held companies.[20] But wealth can be created through many channels. It does not necessarily follow that encouraging earlier and broader retail investor stock ownership necessarily maximizes their welfare because one has to take into account the expected downside risks of such ownership.
Encouraging earlier public offerings exposes retail investors to young, risky firms. While some may become the next Microsoft, many will fail.[21] Indeed, it is a well-established result in the finance literature that many IPOs underperform the market, and this underperformance is concentrated among high idiosyncratic risk stocks.[22] Thus, the presumption that more IPOs automatically translate into greater public wealth neglects the risk dimension.
Furthermore, encouraging or incentivizing firms to go public earlier implicitly pressures founders to relinquish control sooner. That may not align with firm-level or shareholder-level interests. If abundant private capital exists—venture funds, private equity, sovereign wealth funds—public markets are no longer the sole growth channel they were in the 1980s.
When Microsoft went public in the 1980s at a valuation of only a few hundred million dollars, capital markets were less globalized and alternative funding channels were limited. The decision was economically rational in that context. The modern capital ecosystem is far more complex.
IV. The Late 1990s, Benchmark Pressure, and the Incentive Structure of Public Markets
The late 1990s are often cited nostalgically as a period when the United States had many more public companies than there are today. That era is frequently invoked as evidence that we once had a more vibrant public market ecosystem. But it is incomplete—and analytically misleading—to discuss that period solely in terms of listing volume without examining the incentive structure that accompanied it.
The internet boom produced an environment in which companies went public with limited earnings history, and in many cases no earnings at all. Valuations were frequently based on revenue multiples rather than profitability.[23] At the same time, we saw increasing market focus on beating analyst expectations for firm valuation,[24] which did not abate until after post-SOX period.[25]
Public companies were evaluated against quarterly earnings forecasts. What mattered in practice was not necessarily long-term value creation, but whether management could “meet or beat” consensus expectations. Missing by a penny could produce sharp negative stock reactions. Beating by a penny could be rewarded. The penalty for a small shortfall appeared disproportionately large relative to the informational content of the deviation.[26]
From a purely economic standpoint, such asymmetry is difficult to justify. In a fully rational framework, a one-cent deviation from a forecast should not generate discontinuous changes in firm value. Yet empirical research from that era documented precisely such patterns. The market’s response structure created a powerful incentive: avoid the miss at almost any cost. This is because the perception at the time was that missing by one penny shows that managers somehow are incompetent and hence need to be penalized by the market.[27]
Managers are utility-maximizing agents. When the cost of missing a benchmark is high, they search for tools that reduce the probability of missing. That search does not necessarily begin with fraud. It begins with earnings management: shifting revenue recognition, adjusting accruals, accelerating sales, deferring expenses, stretching accounting estimates. In the software and technology sectors in particular, aggressive revenue recognition practices became widespread. The SEC’s issuance of Staff Accounting Bulletin No. 101 was not an innovation in accounting theory; it was a response to systematic abuse of existing principles.[28]
The broader accounting fraud wave of the period—including cases such as Enron, WorldCom, and HealthSouth—did not appear from a vacuum. It arose in a public-market equilibrium characterized by intense benchmark pressure, rapid capital inflows, and weak internal control environments. The subsequent passage in 2002 of the Sarbanes-Oxley Act, the creation of the Public Company Accounting Oversight Board, and the introduction of Section 404(b) internal control audits were reactive measures. They were costly, but they were responses to identifiable incentive failures within public markets. And while these measures were effective in reducing the extent of more extreme abuses, such as most egregious fraudulent accounting restatements,[29] they did not necessarily reduce incentives to meet-or-beat analyst benchmarks.[30]
This history is directly relevant to today’s debate. Expanding the number of public companies is not merely a question of reducing compliance costs, such as extensive SEC disclosures or costs of internal control reporting compliance. It is also a question of how many firms we want operating within an incentive regime defined by benchmark beating, analyst coverage, dispersed ownership, and market-based performance penalties.
If policy reduces regulatory friction and encourages earlier public listings, the likely marginal entrants are smaller, more capital-constrained, and potentially more complex firms. These firms will enter not only public capital markets, but also the benchmark environment that accompanies public status. If they face strong short-term market pressure while still developing internal controls, governance infrastructure, and stable business models, the predictable behavioral response is an increase in earnings management risk.
None of this implies that public markets are inherently undesirable. Public listing provides liquidity, price discovery, and broad ownership participation. But it does imply that increasing the number of public companies increases exposure to the incentive structure of public markets—including its distortions.
The critical policy question is therefore not whether public markets are good in the abstract. It is whether the marginal firm induced to go public under relaxed regulation increases net social welfare once we account for:
the probability of failure,
the probability of reporting distortion under benchmark pressure,
and the distribution of gains and losses across investor classes.
The late-1990s episode demonstrates that high listing volume combined with intense benchmark incentives can generate widespread investor harm. Any contemporary reform agenda should incorporate that lesson explicitly rather than selectively recalling only the headline number of listed firms.
© Francine McKenna, The Digging Company LLC, 2026
[1] Atkins, P. S. (2025, October 9). Keynote address: “Make IPOs great again.” John L. Weinberg Center for Corporate Governance 25th Anniversary Gala. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-10092025-keynote-address-john-l-weinberg-center-corporate-governances-25th-anniversary-gala; Atkins, P. S. (2025, December 2). Revitalizing America’s markets at 250. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-120225-revitalizing-americas-markets-250; Atkins, P. S. (2026, February 23). Remarks on the Investing in America Act and capital formation. U.S. Chamber of Commerce event. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-uscoc-invest-act-022326
[2] “It is about the idea that exposure to the full dynamism of our markets should not be reserved for those who satisfy a certain wealth threshold or are deemed to be sufficiently sophisticated. Investor demand for this exposure is real and robust. Our obligation is to meet that demand with both openness and rigor—expanding pathways with appropriate investor protections. Forums like this one are critical in ensuring that as access broadens, confidence endures.”( Atkins, P. S. (2026, March 4). Opening remarks at the private markets roundtable. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-im-private-markets-roundtable-030426)
[3] See, e.g. Doidge, C., Karolyi, G. A., & Stulz, R. M. (2017). The U.S. listing gap. Journal of Financial Economics, 123(3), 464–487. https://doi.org/10.1016/j.jfineco.2016.12.002 (“…the benefit of [public] listing is zero for the smallest firms and increases with size. The idea is that a large share of the benefit is access to public markets, which is more valuable for larger firms.”, p.465)
[4] See, e,g, U.S. Securities and Exchange Commission. (2016). Changes to Exchange Act registration requirements to implement Title V and Title VI of the JOBS Act. https://www.sec.gov/resources-small-businesses/small-business-compliance-guides/changes-exchange-act-registration-requirements-implement-title-v-title-vi-jobs-act; U.S. Securities and Exchange Commission. (2023). Exchange Act reporting and registration for public companies. https://www.sec.gov/resources-small-businesses/going-public/exchange-act-reporting-registration
[5] See NYSE definition of the “controlled company”: https://nyseguide.srorules.com/listed-company-manual/09013e2c85c00743?searchId=2942794113; Some examples of controlled companies are Alphabet, Airbnb, Meta Platforms, and Oracle (Bebchuk, Lucian A. and Kastiel, Kobi, Controllers Unbound (January 21, 2026). Forthcoming, 105 Texas Law Review (2027), Available at SSRN: https://ssrn.com/abstract=6111106 or http://dx.doi.org/10.2139/ssrn.6111106; p. 6)
[6] “A listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is not required to comply with the requirements of Sections 303A.01 (independent directors requirement), 303A.04 (nominating or corporate governance committee) or 303A.05 (compensation committee). Controlled companies must comply with the remaining provisions of Section 303A”. (https://nyseguide.srorules.com/listed-company-manual/09013e2c85c00743?searchId=2942794926)
[7] Pacces, A. M. (2023). Controlling shareholders and sustainable corporate governance. European Corporate Governance Institute. https://www.ecgi.global/sites/default/files/working_papers/documents/controllingshareholders_0.pdf
[8] See, e.g. Paul A. Gompers, Joy Ishii, & Andrew Metrick. (2010).
Extreme governance: An analysis of dual-class firms in the United States. Review of Financial Studies, 23(3), 1051–1088. https://doi.org/10.1093/rfs/hhp024’ (“In the typical dual-class company, there is a publicly traded “inferior” class of stock with one vote per share and a non-publicly traded “superior” class of stock with ten votes per share. The superior class is usually owned mostly by the insiders of the firm and causes a significant wedge between their voting and cash-flow rights. In many cases, this wedge is sufficient to provide insiders with a majority of the votes despite their claims to only a minority of the economic value. The other forms of antitakeover protection are no match for the power of dual-class stock” (p. 1052, emphasis added)
[9] Bebchuk and Kastiel (2026, p.8).
[10] “it could be that changes in these benefits and costs [of being public] make it unattractive for firms, and especially so for smaller firms, to be public, in which case we might have too few public firms, possibly impeding economic growth” (Doidge, C., Karolyi, G. A., & Stulz, R. M. (2017). The U.S. listing gap. Journal of Financial Economics, 123(3), 464–487. https://doi.org/10.1016/j.jfineco.2016.12.002, p.465).
[11] See, e.g. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law and Economics, 26(2), 301-325.
[12] https://abc.xyz/investor/founders-letters/ipo-letter/ (emphasis added) ;
[13] “As Warren Buffett explained it in his 1996 letter to shareholders, the Class B shares were issued “in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely nonrepeatable, record to entice naive small investors and would have charged these innocents high fees and commissions.”
In addition, he wrote, the new and considerably less expensive shares “provided a low-cost way for people to invest in Berkshire” (https://www.investopedia.com/articles/markets/041714/how-warren-buffett-made-berkshire-hathaway-worldbeater.asp?).
[14] Bebchuk and Kastiel (2026), p.7
[15] “In 1996, the peak year for U.S. listings, the U.S. has 8,025 domestically incorporated companies listed on a U.S. stock exchange. By 2012, that number is only 4,102” (Doige et al, 2017, p. 123, emphasis added). The current estimate of public companies is around 4,300 (https://eqtgroup.com/thinq/equity/why-is-the-stock-market-shrinking); Paul Atkins quoted the number of 4,700 public companies in one of his recent speeches: https://corpgov.law.harvard.edu/2025/10/11/keynote-address-by-chair-atkins-on-revitalizing-public-company-appeal ; Importantly, these numbers reflect the firms listed on national exchanges and do not appear to include publicly held firms traded only on the OTC markets.
[16] See.e.g., Roberto Tallarita. (2018).
High tech, low voice: Dual-class IPOs in the technology industry (Law & Economics Center Working Paper No. 2018-2). Harvard Law School Law & Economics Center. https://laweconcenter.law.harvard.edu/wp-content/uploads/2024/11/2018-2.pdf
[17] Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726.; Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. The American Economic Review, 88(3), 559.
[18] Levine, R. (1991). Stock markets, growth, and tax policy. Journal of Finance, 46(4), 1445–1465. https://doi.org/10.1111/j.1540-6261.1991.tb04625.x
[19] Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.; “The essential point is that these various forms of democratic control of capital depend in large part on the availability of economic information to each of the involved parties…For collective action, what would matter most would be the publication of details accounts of private corporations (as well as government agencies). The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them.” (pp. 569-570, emphasis added).
[20] E.g. Chair Atkins said in one of his speeches: “American entrepreneurs built the most dynamic economy in history in part by taking their companies public—and sharing the rewards with workers, savers, and investors. That partnership is worth reviving…. In closing, I believe that our capital markets are more than the mechanisms of finance—they are, at their core, expressions of our national character. A character that has compelled generations of Americans to take risks and to reap the rewards.” (emphasis added; See: https://www.sec.gov/newsroom/speeches-statements/atkins-120225-revitalizing-americas-markets-250 ). In another speech on Chair Atkins said: “Why should we prohibit a finance professor earning $100,000 a year from private offerings, while presuming that people who inherit wealth are better qualified? And by expanding the investment options available in certain retirement accounts, the bill aims to empower more Americans to participate in the success of promising businesses”. See: https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-uscoc-invest-act-022326
[21] Microsoft was founded in 1975 and went public in 1986 with IPO ask price of $21. As of this writing, Microsoft stock price is $396 (March 15, 2026). See https://news.microsoft.com/facts-about-microsoft/
[22] Chen, H. (2021). IPO underperformance and the idiosyncratic risk puzzle. Journal of Banking & Finance, 131, 106245
[23] Bartov, E., Mohanram, P., & Seethamraju, C. (2002). Valuation of internet stocks—an IPO perspective. Journal of Accounting Research, 40(2), 321-346.
[24] Bartov, E., Givoly, D., & Hayn, C. (2002). The rewards to meeting or beating earnings expectations. Journal of accounting and economics, 33(2), 173-204.;
[25] Koh, K., Matsumoto, D. A., & Rajgopal, S. (2008). Meeting or beating analyst expectations in the post‐scandals world: Changes in stock market rewards and managerial actions. Contemporary Accounting Research, 25(4), 1067-1098.
[26] “Evidence of an increasing trend in earnings surprises over the past two decades: The role of positive manager-initiated non-GAAP adjustments,” published in 2021, found a steady increasing trend in positive street earnings surprises over the past two decades. “This trend reflects an asymmetric shift to the right—from substantially fewer small earnings surprises around zero to many more and larger ones well above zero.” A larger number of companies have been using non-standard numbers to produce quarterly earnings per share that exceed analysts’ forecasts by 5 to 15 cents not a penny or two. Analysts enable this behavior, since they may “increasingly bias their Street expectations downwards to generate a more positive response [from earnings surprises] for their clients – that is, they engage in strategic pessimism,” the authors wrote.
[27] This created what Skinner and Sloan (2022) called “the earnings “torpedo” effect—the fact that missing analysts’ forecasts, even by small amounts, causes disproportionately large stock price declines” Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7, 289–312, p.300.
[28] See https://www.sec.gov/interps/account/sab101.htm ; ” The staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter.”
[29] See, e.g. https://blog.auditanalytics.com/the-impact-of-sox-on-financial-restatements
[30] See Huang, S. X., Pereira, R., & Wang, C. (2017). Analyst coverage and the likelihood of meeting or beating analyst earnings forecasts. Contemporary Accounting Research, 34(2), 871-899. They show that the analyst coverage is associated with benchmark beating in post-SOX era.
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