Friday, September 7, 2012

The Death of IPO's and What it Means for You and The Country

With today's jobs report this topic is going to get spun like a top.
(96,000 jobs 38 months after the recession ended? Come on)

Let's state what should be obvious right up front: Small business is no better at job creation than big business and because of the churn of bankruptcies and closures probably worse on a net basis.

Most small businesses don't grow very fast and can't create jobs.

The key variable, as even a cursory review* of the literature makes clear, is the age of the business.
In particular firm births are correlated with both net and gross job creation and it is only because most new firms are small that small business is credited with job creation.

Because of the facts of who creates jobs, a policy initiative that focuses only on size without taking age of the enterprise into consideration will have little effect other than redistributing wealth to the wrong group of companies.

From ZeroHedge:
The chart below by way of Grant Thornton shows something rather disturbing: in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s, and in 2012 was just shy of all time lows (which have been recorded during periods of great market crashes, not when the S&P is about to hit its yearly highs). As such the lack of success of such prominent recent names as FaceBook, Zynga, Groupon and many others, is not simply a function of valuation and investor sentiment, but related to the ongoing deteriorating in the underlying market structure for a variety of reasons, many of which have been written about here in the past.
Some more visual confirmation of how the US IPO market is on its last breath:

While the fundamental reasons for the death of the IPO are many, one of the underlying causes is the incursion of HFT courtesy of the collapse in of the trade tick size, as technology has played an ever greater role in trading and market structure leading to a two-tiered market (think of its as one for the collocated algos, aka those on steroids, and one for the "rest of us") which in turn has shifted the focus of the market from a discounting mechanism, to one which merely rewards fast response time, and therefore short-term momentum perpetuation, which tends to blow up those long-term investors who do not have a big enough balance sheet to absorb margin shifts in either direction, and broadly favors ultra-short term trading, instead of long-term investing....MORE

Grant Thornton IPO

*A good place to start is "Who Creates Jobs? Small vs. Large vs. Young" (47 page PDF)
Kelley Edmiston at the Kansas City Fed is also pretty good. (25 page PDF)
A related topic "What Do Small Businesses Do?" by a couple University of Chicago econ guys (64 page PDF)