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The shrinking stock market

Michael B. McDonald IV Ph D
Journal of Financial Markets, Volume 58, March 2022


The total number of publicly traded firms in the United States has fallen by half since the late 1990s. As a result, the size of the market is roughly the same as it was in 1991 despite the overall economy tripling in size since that time. This study examines this trend showing the long-term shrinking stock market trend is associated with higher levels of cash dividend payouts by firms, slower rates of profit and revenue growth, and less firm-level risk, all of which point to an average firm that is later in its lifecycle. The loss of firms has a more substantial impact on revenue and profit growth rates for the marginal firm in the market than the addition of new firms does. These results have important implications for the broader economy and support studies which find that smaller firms are being purchased by larger firms rather than going public.