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    The State of the Public Corporation: Not So Much an Eclipse as an Evolution
    8 Conrad S. Ciccotello, Georgia State University
    Capital Deployment Roundtable:
    A Discussion of Corporate Investment and Payout Policy
    22 Panelists: John Briscoe, Bristow; Paul Clancy, Biogen Idec;
    Michael Mauboussin, Credit Suisse; Paul Hilal,
    Pershing Square Capital Management; Scott Ostfeld,
    JANA Partners; Don Chew and John McCormack, Journal of
    Applied Corporate Finance.
    Moderated by Greg Milano, Fortuna Advisors.
    Capital Allocation: Evidence, Analytical Methods, and Assessment Guidance
    48 Michael J. Mauboussin and Dan Callahan, Credit Suisse
    Bridging the Gap between Interest Rates and Investments
    75 Marc Zenner, Evan Junek, and Ram Chivukula, J.P. Morgan
    An Unconventional Conglomerateur: Henry Singleton and Teledyne
    81 William N. Thorndike, Jr.
    The Icahn Manifesto
    89 Tobias Carlisle
    Off Track: The Disappearance of Tracking Stocks
    98 Travis Davidson, Ohio University, and Joel Harper,
    Oklahoma State University
    The Gap between the Theory and Practice of Corporate Valuation:
    Survey of European Experts
    106 Franck Bancel, ESCP Europe-Labex ReFi, and
    Usha R. Mittoo, University of Manitoba
    Are Certain Dividend Increases Predictable? The Effect of Repeated
    Dividend Increases on Market Returns
    118 David Michayluk, University of Technology, Sydney,
    Karyn Neuhauser, Lamar University, and Scott Walker,
    University of Technology, Sydney
    VOLUME 26  | NUMBER 4  | FALL 2014
    APPLIED CORPORATE FINANCE
    Journal of
    8 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    The State of the Public Corporation:
    Not So Much an Eclipse as an Evolution
    代写 Are U.S. Companies Underinvesting?
    by Conrad S. Ciccotello, Georgia State University*
    In addition, uncorporates are designed to satisfy a special
    requirement of a growing investor clientele: current income.
    The demand for tax-efficient, yield-based investments has
    exploded in response to not only demographic shifts—
    specifically, the increase in life expectancy for people reaching
    normal retirement age—but also to macroeconomic factors
    (such as the recent prolonged period of low nominal interest
    rates), and shifts in the risk of retirement income provision-
    ing from government and business to households (reflected,
    for example, in the rise of defined contribution-type pension
    plans and the decline of defined benefit plans).
    In the second section of the article, I present evidence of
    the decline in the number of U.S. publicly traded corpora-
    tions. Using Compustat to examine ten (two-digit) Standard
    Industrial Classification industries, I identified the peak
    number of public companies in each of the ten industries
    during the period 1966-2013 and then compared the sum of
    those peak numbers to the total number for the year 2013.
    On that basis, the total sample has fallen from almost 4,000
    public companies to 1,652, a drop of nearly 60%.
    The next part of my analysis focuses on the performance
    of U.S. public companies. To analyze performance I use
    a “Dupont decomposition” of the companies’ returns on
    equity (ROE) during the same 48-year period. This exercise
    highlights some interesting trends. In nine of the ten indus-
    tries I examine, the median annual return on equity (ROE)
    during the latter half of the 48-year time period (1990-
    2013) was lower than the median return for the first half
    (1966-1989). But while the median ROE has been falling,
    the dispersion of ROEs—as reflected in a statistic called the
    interquartile range—has been increasing over time in every
    industry.
    In addition to the trends in ROE, I also examine trends in
    Tobin’s Q ratios for the same ten-industry sample of compa-
    nies. Tobin’s Q is a measure of value added in that it sets
    the current market value of corporate assets against either
    their current “replacement value” or the historical amounts
    for which they were acquired. In contrast to my findings
    wenty-five years ago Harvard Business School
    professor Michael Jensen wrote an article in the
    Harvard Business Review called “Eclipse of the
    Public Corporation.” 1 In that article, Professor
    Jensen hailed the rise of leveraged buyouts as “a new orga-
    nizational form,” one that promised to cause a significant
    fraction of corporate America to shift from public to private
    ownership. More specifically, Jensen predicted that the
    private conglomerations of assets being amassed by the new
    “LBO partnerships”—or what are now called private equity
    firms—would end up supplanting public conglomerates and
    perhaps come to dominate the more mature sectors of the
    U.S. economy (those no longer requiring major infusions
    of new equity). The key to the success of the LBO part-
    nerships, as Jensen saw it, was the concentration of equity
    ownership—much of it in the hands of management and the
    board—made possible by heavy reliance on debt financing. In
    Jensen’s words, “The LBO succeeded by substituting incen-
    tives held out by compensation and ownership plans for the
    direct monitoring and often centralized decision-making of
    the typical corporate bureaucracy.”
    Relying on the analytical framework presented in Jensen’s
    classic article, 2 and with the benefit of a quarter-century of
    hindsight since its publication, I begin this article by present-
    ing some thoughts and evidence on the current state of the
    public corporation. By some yardsticks, the public corpo-
    ration appears to be in the midst of a pronounced secular
    decline—a displacement by alternative organizational forms
    that include not only the LBOs that Jensen focused on in
    1989, but others that have been the focus of my own research.
    In the first section of this article, I summarize evidence
    of the dramatic rise during the past two decades of what
    some scholars—notably, the late Larry Ribstein—have
    called “uncorporate” public structures. As analyzed and
    documented by Professor Ribstein and others, the growth
    of “uncorporates” has been a function of several key factors,
    including the demand by investors for greater transparency
    and operational focus, and for more effective governance. 3
    *I am grateful to Huimin Li for research assistance and to Don Chew, the editor, and
    Vlado Atanasov for valuable thoughts and comments.
    1. Michael Jensen, “Eclipse of the Public Corporation,” Harvard Business Review,
    September-October 1989.
    2. See also Michael Jensen, “Corporate Control and the Politics of Finance,” Journal
    of Applied Corporate Finance, Vol. 4, No. 2, (Summer 1991), pp. 4-33.
    3. See, e.g., Larry Ribstein, “Energy Infrastructure Investment and the Rise of the
    Uncorporation,” Journal of Applied Corporate Finance, Vol. 23, No. 3, (Summer 2011),
    pp 75-83; Conrad Ciccotello, “Why Financial Institutions Matter: The Case of Energy
    Infrastructure MLPs” Journal of Applied Corporate Finance, Vol. 23, No. 3, (Summer
    2011), pp 84-91.
    9 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    on ROE, for nine of the ten industries, the median annual
    Q ratio has actually increased over time. At the same time,
    similar to the ROE findings, the interquartile range of Q
    has also increased over time in every industry. Overall, the
    ROE and Q findings suggest a growing separation of the best
    from the rest.
    In the pages that follow, I argue that these trends in ROE
    and Q are associated with three main developments that have
    been taking place since publication of Jensen’s article at the
    end of the 1980s. First is the increasingly competitive global
    marketplace for goods and services. Second is the emergence
    of a deep and vigorous market for corporate control, in which
    activist investors compete for the rights to influence—or, in
    some cases, assume control of—corporate decision-making. 4
    Third is the strengthening of internal incentives, provided by
    increased equity ownership and other forms of equity-linked
    compensation, to motivate the managers of public companies
    to maximize the value of their firms, in some cases by selling
    or otherwise divesting them. 5
    During the past 25 years, the combination of these three
    factors has made the surviving corporations highly efficient
    while pressuring (or otherwise encouraging) poor perform-
    ers to restructure. As a consequence, although the median
    surviving public corporation has done a “better” job of creat-
    ing value with its assets (as reflected in higher Q ratios), that
    same median firm still faces a very challenging competitive
    environment (as reflected in falling ROEs). Moreover, the
    trends seem to have “room to run,” as the spread between
    winners and losers continues to widen in terms of both profit-
    ability and value creation.
    Placing considerable weight on the findings of a recent
    study called “Where Have All the IPOs Gone?,” I argue
    that the public corporation structure has increasingly been
    rewarded by the market for achieving more efficient scope and
    scale, especially in a global marketplace. 6 In many industries,
    rapid technological innovation, large capital requirements,
    and reduced customer search costs have combined to put
    pressure on the profitability of small firms. 7 Beyond the
    economics of competition, large successful public corpora-
    tions also have a competitive advantage at managing the
    “business-government interface”—that is, at influencing
    public policy decisions that affect their expected profitability
    and franchise value. For example, innovative tax policies by
    large multinational firms have removed much of the sting of
    the corporate income tax through the use of cross-country
    tax arbitrage. Together, these factors have ushered in a golden
    age for the best of the best public corporations and pressure
    to restructure for the rest.
    Following this account of the evolution of U.S.-based
    companies, I then attempt to present a more global view of the
    rise of the public corporation. Since the end of the 1980s, the
    world has witnessed not only the dramatic rise of dominant
    multinational corporations (MNCs), but also the extraordi-
    nary growth of the state-owned public corporation (typically
    known as “state-owned enterprises,” or SOEs), especially in
    developing countries. From the big-bang privatizations in
    Eastern Europe and Russia to the gradual privatization in
    China, the impact of SOEs has been profound.
    Having the government as a major shareholder presents
    the SOE with an array of challenges and options that are
    different from those facing U.S.-domiciled MNCs. MNCs
    must compete against SOEs that are likely to be heavily subsi-
    dized by their governments, which are also their controlling
    shareholders. But at the same time, MNCs have more freedom
    代写 Are U.S. Companies Underinvesting?
    Viewing the MNC and SOE as entities along a single
    public corporation continuum yields an interesting insight.
    Since the publication of Jensen’s “Eclipse” article in the late
    ’80s, the public corporation has increasingly been used by
    governments as a vehicle to project economic (and politi-
    cal) power on a global stage. In the case of the SOE—and
    perhaps to some extent even the MNC—there is also the rise
    of the power of large shareholders, and along with it a notable
    increase in conflicts among different classes of shareholders
    as well as the more traditional conflict between corporate
    managers and their shareholders. 8
    In the final section of the article, I attempt to summa-
    rize the main factors influencing the evolution of the public
    corporation over the past quarter century. The overall picture
    is mixed. In some respects—and by some measures—the
    public C-Corporation is indeed being eclipsed. Governance
    and investor clientele effects are driving the extraordinary
    growth of uncorporates. Intense product market competi-
    tion, the need for efficient scope and scale, the rise of highly
    efficient MNCs, and a well-functioning market for corpo-
    rate control are significantly “thinning the herd” of public
    4. For an excellent discussion of this market, and the role of private equity in forcing
    public companies to become more efficient, see Karen Wruck, “Private Equity, Corporate
    Governance, and the Reinvention of the Market for Corporate Control,” Journal of Ap-
    plied Corporate Finance, Vol. 20, No. 3, Summer 2008, pp. 8-21.
    5. See in this issue, Michael Mauboussin and Dan Callahan, “Global Capital Alloca-
    tion,” Credit Suisse First Boston.
    6. See Xiaohui Gao, Jay Ritter, and Zhongyan Zhao, “Where Have All the IPOs Gone?”
    Journal of Financial and Quantitative Analysis, Vol. 48, No. 6 (December 2013), pp.
    1663-1692.
    7. Id.
    8. See V. Atanasov, B. Black, and C. S. Ciccotello, “Unbundling and Measuring Tun-
    neling,” University of Illinois Law Review—Issue in Tribute to Larry Ribstein. (2014), pp.
    101-142; V. Atanasov, B. Black, and C. S. Ciccotello, “Law and Tunneling,” Journal of
    Corporation Law 37 (1), (2011), pp. 101-151; V. Atanasov, B. Black, C. S. Ciccotello,
    and S. Gyoshev, “How Does Law Affect Finance? An Examination of Equity Tunneling in
    Bulgaria,” Journal of Financial Economics 96, (2010), pp. 155-173; V. Atanasov, “Is
    There Shareholder Expropriation in the United States? An Analysis of Publicly-Traded
    Subsidiaries,” Journal of Financial and Quantitative Analysis, 45, (2010) pp.1-26.
    10 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    corporations. But in other respects, the public corporation
    structure has evolved, and even thrived, over the past 25
    years. Public corporation “winners” are larger, more efficient,
    and arguably more influential than ever before. Moreover, the
    rise of massive MNCs (and in a global context, SOEs) has
    blurred the lines between business and government.
    Based on the analysis of the trends discussed above, the
    final section concludes with some thoughts about where the
    public corporation is heading in the next 25 years.
    Reasons for the Growth of Uncorporates
    To help in understanding the drop in the number of public
    companies, let’s begin by looking at the growth in public
    uncorporate firms and the underlying reasons for that
    growth. One major benefit of uncorporate structures arises
    from their pass-through tax treatment; that is, similar to a
    partnership, there is no income tax at the entity level. By
    contrast, the C-corporation pays an entity-level tax; and if
    it makes distributions in the form of dividends, the owners
    owe taxes on those dividends at the applicable individual tax
    rate. Pass-through tax treatment thus creates a tax incentive
    to distribute cash instead of retaining it. That tax treatment
    has propelled the growth of the REIT and MLP, in combi-
    nation with the clientele and governance effects discussed
    below.
    Investor Clientele
    The world’s population is aging rapidly, especially in devel-
    oped nations. Birth rates have fallen below replacement levels
    (approximately 2.1 children per couple) on every continent
    except Africa. But even more important to the investor clien-
    tele story is the increase in life expectancy contingent on
    reaching normal retirement age. According to the Social
    Security Administration, males who reach age 65 in the U.S.
    are currently expected to live for another 19.3 years—and
    for women the expectation is another 21.6 years. According
    to data from the Census Bureau, the percentage of the U.S.
    population over 65 will increase from 13% in 2010 to 20%
    in 2050.
    What do such demographics have to with the state of
    the public corporation? The short answer is that shifting
    demographics are creating a larger investor clientele with a
    demand for current income and higher yields.
    Two other widespread changes that have accompanied
    demographic shifts have been accentuating these clien-
    tele effects. The first is the economy-wide move away from
    defined-benefit retirement plans—in the public as well private
    sectors—and toward self-funded retirement in contribution
    style plans. The Social Security Administration reports that
    from 1980 to 2008, the proportion of private wage and salary
    workers participating in defined benefit plans fell from 38
    to 20 percent. Neither governments nor companies want
    the burden of longevity risk, as fallout from underfunded
    pensions grips a growing number of entities (think about
    recent developments in the state of Illinois). Assuming the
    risk of providing for their own future consumption has, at
    least at the margin, altered investors’ relative preference for
    income over capital appreciation.
    The second is the growing difficulty of the search for yield
    while avoiding significant principal risk. Thanks to a three-
    decade long bull market in bonds, risk-free rates have fallen
    to basically zero. Declining interest rates have triggered a
    refinancing bonanza for high credit quality firms and dropped
    “junk” bond rates to all-time lows, but have also brought
    about an ever-increasing thirst for yield by investors. Thus,
    lower interest rates and the need to fund one’s own retirement
    years have increased the demand for yield products. Adding
    to this demand, investors appear to have become increasingly
    reluctant to convert their assets into annuities. 9
    A growing stream of dividends from a high-quality
    portfolio of public corporations is one possible answer to the
    problem. But public corporations, as already noted, face the
    burden of double taxation. While qualified dividend income
    (QDI) taxation at the individual level blunts the tax burden
    somewhat, the combined corporate income tax rate of 35%
    and the (maximum) QDI rate of 23.8% is still quite high.
    So, until quite recently, when the search for yield has become
    extreme, many corporations have been relatively slow to
    increase dividends.
    In contrast to C corporations, uncorporate structures such
    as REITs and MLPs have tax-based incentives to distribute cash
    rather than retain it. Assuming they obey the tax rules, these
    structures avoid the entity-level tax that corporations must pay.
    Thus, the numbers of REITs and MLPs have grown markedly
    in order to meet the demands of yield-oriented investors who
    have been “nudged” away from fixed-income investments by
    low nominal yields. This nudge is toward higher-risk products,
    moving from investment grade toward “junk” debt, and even
    income-producing equities. MLPs and REIT equities have
    filled this demand for equity income. The assets of the typical
    REIT and MLP are themselves long lived (namely, real estate
    and energy infrastructure), thus matching the goal of providing
    a long-lived stream of growing investment income.
    In sum, demographic and retirement planning trends
    suggest that the population of income-oriented investors will
    continue to grow over the coming decades, which bodes well
    for the popularity of uncorporate structures like the REIT
    and MLP.
    9. Concerns about annuities range from distrust of the strong commission-based in-
    centives behind the sale of such products, product complexity, the lack of transparency
    into annuity costs, and the inability to access larger sums of money when needed once
    distributions have started. See Jeffrey Brown, “Understanding the Role of Annuities in
    Retirement Planning.” In Annamaria Lusardi, ed., Overcoming the Savings Slump: How
    to Increase the Effectiveness of Financial Education and Saving Programs. University of
    Chicago Press. 2009. pp. 178- 206.
    11 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    Similarly, the REIT has become an attractive structure
    for corporate conversions, thanks to its tax, clientele, and
    governance advantages. The traditional boundaries of this
    form have also widened. Growing from its roots in multi-
    family and commercial real estate, REITs have become
    the structure of choice for such rapidly growing entities
    as Health Care Properties and American Tower. In recent
    years, the expansion of REIT status has occurred mainly
    through Private Letter Rulings that have extended the
    REIT qualification to other kinds of assets, notably energy
    and telecommunications infrastructure. 15 Based on data
    from REIT.com, in 2003 there were 171 REITs with a
    market capitalization of about $224 billion. By 2013, the
    number of REITs had grown to 202 with a total market cap
    of $670 billion.
    But even as MLPs and REITs are growing substantially
    in numbers and market capitalization, they are still small
    in number and size relative to publicly traded corporations.
    They now comprise well less than 10% of all publicly traded
    firms and about 5% of total market capitalization. And to
    put size into perspective, consider that in 2013 the market
    capitalization of Exxon alone, about $400 billion, repre-
    sented nearly 80% of the value of the entire MLP sector.
    While the size and number do look small when set
    against those of public corporations, the growth of the
    uncorporate forms is testimony to the importance of inves-
    tor clientele, tax treatment of distributions, and governance
    factors when choosing an organizational form. But these
    are not the only major contributors to the decline in the
    number of public companies. We now consider some other
    important factors.
    Decline in the Number of Public Corporations
    Profitability and Valuation Trends
    Having discussed the underpinnings and growth in the
    number and size of uncorporates, let’s now look more closely
    at the striking drop in the number of public corporations.
    Near the end of 2013, Michael Santoli wrote in Barrons,
    “The Wilshire 5000 is the oldest index that seeks to replicate
    the entire U.S. market. It never had exactly 5,000 stocks
    (that was just a marketing-driven estimate) but it often came
    close. Today (December 6, 2013), it contains just over 3,600
    names.” 16 Citing data from Strategas Group, Santoli states
    that the number of companies traded on U.S. exchanges
    peaked at 8,800 in 1997 and had fallen to 4,900 by the end
    of 2012. 17
    Governance
    While tax and investor clientele are significant considerations
    when choosing an organizational structure, I argued many
    years ago—first in my Ph.D. dissertation and later in
    published papers—that governance is also an important
    aspect of the uncorporate restructuring. 10 Strict tax rules
    and a clientele that demands distributions drive operational
    focus, and the need for efficiency and transparency. 11 Firms
    in the MLP structure that cut distributions tend to be
    harshly treated, as the Boardwalk MLP distribution cut in
    early 2014 demonstrates. 12
    And as Jensen argued in “Eclipse” and elsewhere,
    the C-Corporation form does not necessarily provide
    effective incentives for either focus or cash distribution;
    and unless acted upon by outside forces, the natural tendency
    of managers of public corporations to pursue growth at the
    expense of profitability and value has often led to excessive
    diversification and other ways of “wasting” corporate
    “free cash flow.” As Jensen defines it, “free cash flow” is
    the operating cash flow that cannot be profitably
    reinvested in the company; and because of the above-noted
    tendency to waste such cash flow, it must be paid out to
    shareholders to help ensure that the companies will maximize
    their value.
    Compared to the hostile takeovers and LBOs applauded
    by Jensen, MLPs were a relatively “quiet restructuring” that
    incentivized mature businesses to pay out cash and meet
    the needs of their income-oriented clientele. 13 Qualification
    rules drive distribution policy in REITs. In order to qualify
    as a REIT, a company is required to pay out at least 90% of
    its taxable income each year to shareholders as dividends.
    Growth of Uncorporate Forms
    Up to this point I have discussed trends in demographics,
    investor clientele, and governance that have all contributed
    to the uncorporate restructuring movement. This section
    outlines the actual growth in these forms.
    According to data from Wells Fargo Securities, there
    were 32 MLPs in 2003 with a total market capitalization
    of $45 billion. By 2013, the number of MLPs had grown to
    107 and the market capitalization approached $500 billion.
    This spectacular growth has been fueled in large part by the
    build-out of energy infrastructure that has accompanied the
    U.S. shale revolution. 14 Passage of the MLP Parity Act, which
    would open the structure to alternative energy firms, could
    lead to even more growth.
    10. See Conrad Ciccotello and Chris.Muscarella. “Contracts between Managers and
    Investors: A Study of Master Limited Partnership Agreements,” Journal of Corporate Fi-
    nance 7, (2001), pp. 1-23; Conrad Ciccotello and Chris.Muscarella. Matching Organi-
    zational Structure With Firm Attributes: A Study of Master Limited Partnerships, Review
    of Finance, 1, (1997), pp. 169-191.
    11. See Ribstein, supra note 3.
    12. Boardwalk’s MLP units fell by about 50% in value in response to a distribution
    cut from $0.532 to $0.10 per quarter. See http://247wallst.com/infrastruc-
    ture/2014/02/10/is-boardwalk-just-the-start-of-nat-gas-mlp-woes/.
    13. See John Kensinger and John Martin. “The Quiet Restructuring,” Journal of Ap-
     
    quartile range.” This range is the difference between the 25th
    and 75th percentiles, and is a simple measure of dispersion.
    With the annual percentile rankings by industry as input,
    I then obtained the median 25th, 50th (median), and 75th
    percentile values (and interquartile ranges) from the distri-
    butions of annual performance. From the median annual
    values in the two (24-year) time periods (1966-1989 and
    1990-2013), I observe time trends.
    Figure 3 shows the results over the two 24-year time periods.
    In the case of the ROEs, the pattern is striking. In nine of the
    ten industries in my sample, the median (of annual medians)
    for the later time period (1990-2013) turned out to be lower
    than that for the earlier period (1966-1989). And some of the
    differences were quite large. In the case of Oil and Gas, for
    example, the median of annual median ROEs was 8.83% for
    the 1966-1989 period, and 4.40% for the 1990-2013 period.
    And in both Business Services and Professional Services, the
    drops in median annual ROE were from above 12% (12.51 and
    12.81, respectively) to roughly 7% (7.23 and 6.29).
    In this section, I investigate the reasons for this decline. I
    begin by examining trends in corporate performance. Using
    the Compustat database, I study companies that appear in
    ten different two-digit Standard Industrial Classifications
    (SICs). Figure 1 shows that these ten two-digit industries
    give broad representation to different sectors of the economy
    as they are spread across nine different one-digit SICs. And
    as also noted earlier, I look at the performance of these ten
    industries over the 48-year period from 1966 through 2013.
    For each of the ten industries in my study, Figure 2 shows
    the beginning (1966), peak, and current (2013) number of
    companies listed on Compustat. All of the industries exhibit
    a common pattern of falling numbers. But the timing of
    the peak year, and thus the beginning of the decline, varies
    considerably among industries. The earliest peaks in terms
    of numbers of companies take place in the categories of
    department stores and variety retailers (SIC 53xx)—which
    reached a maximum of 103 companies in 1974 (and had
    fallen to 19 in 2013)—and of auto and aircraft manufacturers
    (SIC 37xx), where the peak level of 175 companies in 1975
    had dropped to 94 by 2013. As for the most recent industries
    to peak, communications (SIC 48xx) reached a high of 310
    companies in 2000, which was down by almost two thirds to
    112 in 2013. And chemicals and allied products (SIC 28xx),
    which had 640 companies as recently as 2006, had fallen by
    almost half to 371 seven years later.
    The total decline in the number of publicly traded
    companies for the ten industries measured in terms of
    the peak for each industry is over 2,300, representing
    approximately 60%. By comparison, the growth in the
    numbers of uncorporates is small. And even if we assume
    that each of these new uncorporates was converted from the
    public corporate form (which is clearly an exaggeration), the
    g代写 Are U.S. Companies Underinvesting?
    35 XX Computers & Office Equipment
    37 XX Auto & Aircraft Manufacturing
    48 XX Communications
    53 XX Retail – Department/Variety
    65 XX Real Estate
    73 XX Business Services
    87 XX Professional Services
    Figure 2 Number of Compustat Firms by Year
    in Ten Different Industries
    Industry Beginning
    (1966)
    Peak
    (Number)
    Peak
    (Year)
    Current
    (2013)
    Agriculture –
    Crops
    9 20 1996 15
    Oil and Gas 74 441 1982 210
    Chemicals and
    Allied Products
    162 640 2006 371
    Computers &
    Office Equipment
    234 574 1995 190
    Auto & Aircraft
    Manufacturing
    146 175 1975 94
    Communications 50 310 2000 112
    Retail –
    Department/
    Variety.
    61 103 1974 19
    Real Estate 34 163 1978 45
    Business
    Services
    64 1344 1999 524
    Professional
    Services
    27 217 1998 72
    Total 861 3987 1652
    13 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    Figure 3 Dupont Decomposition of Median Annual
    Return on Equity (ROE) in Ten Industries
    Early Period (1966-1989) Compared to
    Later Period (1990-2013)
    Industry Return on
    Equity (%)
    Net Profit
    Margin (%)
    Asset
    Turnover
    Equity
    Multiplier
    Agriculture – Crops 9.37 – 5.81 5.22 - 3.46 0.88 - 0.63 2.06 – 1.93
    Oil and Gas 8.83 – 4.40 9.27 – 3.57 0.33 – 0.33 1.78 – 1.83
    Chemicals and
    Allied Products
    12.64 - -0.39 5.00 - -23.19 1.29 – 0.46 1.73 – 1.34
    Computers &
    Office Equipment
    11.04 – 7.67 4.04 – 1.86 1.27 – 0.99 1.83 – 1.63
    Auto & Aircraft
    Manufacturing
    11.76 – 11.82 3.50 – 2.70 1.52 – 1.15 2.11 – 2.20
    Communications 12.86 – 6.21 10.98 – 2.14 0.40 – 0.49 2.49 – 2.01
    Retail –
    Department/Variety
    10.94 – 10.39 2.38 – 1.72 2.11 – 1.95 2.28 – 2.20
    Real Estate 6.13 – 4.89 6.18 – 3.41 0.23 – 0.22 2.66 – 1.91
    Business Services 12.51 – 7.23 3.77 – 0.90 1.17 – 0.88 2.01 – 1.50
    Professional
    Services
    12.81 – 6.29 2.98 – 0.56 1.49 – 1.01 2.02 – 1.68
    Net profit margin is net profit/sales; asset turnover is sales/assets, and equity multi-
    plier is assets/equity.
    Industry Return on Equity
    (25 th Percentile)
    Early Later
    Return on Equity
    (75 th Percentile)
    Inter-Quartile
    Agriculture – Crops 5.19 – -2.73 15.49 – 13.37 10.30 – 15.60
    Oil and Gas -0.52 – -10.46 15.94 – 14.27 16.46 – 24.73
    Chemicals and
    Allied Products
    7.68 - -52.91 18.64 – 22.12 10.96 – 75.03
    Computers &
    Office Equipment
    5.02 – -10.07 18.09 –19.05 13.07 – 29.12
    Auto & Aircraft
    Manufacturing
    5.44 – -0.88 17.73 – 21.39 12.29 – 22.27
    Communications 8.15 – -16.26 16.22 – 24.50 8.07 – 40.76
    Retail – Depart-
    ment/Variety.
    7.53 – 2.67 16.42 – 17.36 8.89 – 18.03
    Real Estate -2.28 – -6.74 18.39 – 18.46 20.67 – 25.20
    Business Services 3.17 –-14.01 21.39 – 21.42 18.22 – 35.43
    Professional
    Services
    2.61 – -22.29 20.01 – 18.72 17.40 – 41.01
    pattern. In the latter period (1990-2013), the median annual
    interquartile range of ROE was higher in all 10 industries
    (relative to the 1966-1989 period). Several of the increases in
    median annual interquartile range between the time periods
    are strikingly large, such as those recorded for the Chemicals
    and Allied Products, and Communications industries.
    But even as the median ROE is tending to decline over
    time, it is interesting to note that the pattern does not hold
    at the 75th percentile. Figure 4 shows that ROE at the 75th
    percentile does not tend to decline in the latter period (1990-
    2013). This is more evidence of the growing spread between
    top-quartile winners and other firms. Winners are achieving
    higher levels of return on equity, even as more competitive
    product and service markets continue to drag down the
    median ROE.
    As a measure of operating performance, ROE has the
    limitation that it fails to introduce any aspect of market
    valuation into the analysis. To complement the ROE
    analysis, I examined trends in Tobin’s Q using the same
    methods that I used when analyzing ROE. Tobin’s Q is
    computed as the ratio of market value of assets to book
    value of assets. Q is proxy for the market’s assessment of
    management’s value added, its effectiveness in using the
    firm’s assets.
    The Dupont decompositions of ROE in Figure 3 show
    that a significant part of the reductions were attributable
    to shrinking profit margins; indeed, all ten industries
    had lower median net margins in the latter period. Some
    margin declines were particularly striking, especially those
    experienced in the Chemicals and Allied Products and
    Communications industries. But thinner margins do not
    explain the entire decline in ROEs. Asset turnover also
    generally declines in the latter period, and so does the equity
    multiplier.
    The results summarized in Figure 3 suggest that
    competition in product and service markets has been
    increasing over time. All else equal, lower profit margins
    suggest greater competition. But that said, it’s important
    to recognize that the possibility that direct comparison of
    accounting metrics over long periods of time can be distorted
    by a consistent bias. Many accounting rules have changed
    since the 1960s. One change that might decrease reported
    profitability is the trend toward the use of accelerated
    depreciation methods over time. 18
    Recognizing the potential problems with comparisons of
    median values, I also examined trends in dispersion over time.
    Figure 4 shows the median annual interquartile range over the
    same two 24-year periods. Rather than declining over time
    like the median, the interquartile range shows the opposite
    Figure 4 Median Annual 25th and 75th Percentile
    Return on Equity in Ten Industries
    Early Period (1966-1989) Compared to
    Later Period (1990-2013)
    18. ROE results do hold across both capital-intensive and service industries, so de-
    preciation bias is not a clear-cut explanation for the sample at large.
    14 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    As reported in Figure 5, the median annual Q ratio, in
    contrast to the ROE results, was higher in eight of the ten
    industries in the later time period. But, similar to the pattern
    for ROEs, the interquartile range in Q, as shown in Figure 6, is
    growing over time. In nine of the ten industries I studied, the
    median interquartile Q was higher in the later period than the
    earlier period (and in one industry it remained unchanged).
    In the study I cited earlier called “Where Have All the
    IPOs Gone?,” the authors (Gao, Ritter, and Zhao) assert
    that growing economies of scope are likely to be the most
    important explanation for the decline in the number of public
    companies. 19 The product and customer advantages possessed
    by large public firms make it difficult for new entrants to
    compete. The capital requirements necessary to take advantage
    of scope and scale economies are vast, and the time that capital
    market investors allow new public firms to show positive
    results is shrinking (as discussed in the next section). In a
    similar vein, a study by Brau and Fawcett relies on survey data
    to argue that the most often cited reason companies go public
    is to make acquisitions. 20 And consistent with this argument,
    those companies that do go public seem increasingly eager to
    sell themselves to larger firms when they perceive that they
    are unable to compete in the medium to longer term. 21 So
    the game appears to be either to go public to acquire, or to
    be acquired.
    The Development of the Market for
    Corporate Control22
    One of the main forces leading to the drop in the number
    of U.S. public companies has been the operation of the U.S.
    market for corporate control. Introduced by Henry Manne
    as early as the 1960s, the concept of a corporate control
    market was refined and documented by Michael Jensen and
    his colleague Richard Ruback in the early 1980s, during the
    first U.S. wave of debt-financed hostile takeovers and lever-
    aged buyouts. Defined by Jensen and Ruback as “the market
    in which alternative management teams compete for the right
    to manage corporate resources,” the concept of a market for
    corporate control was “an extension of the managerial labor
    market.” 23 The basic idea is that if the current team of manag-
    ers at a public firm is not employing resources efficiently, and
    the company’s board fails to act, outside forces will ensure
    that the management team will be replaced by another, gener-
    ally more effective, team. This team could come from another
    public company through a takeover or be supplied by an
    “unaffiliated” group of investors.” 24 But either way, the under-
    lying expectation that the new management will improve
    Figure 6 Median Annual 25th and 75th Percentile
    Q-Ratio in Ten Industries
    Early Period (1966-1989) Compared to
    Later Period (1990-2013)
    19. See Gao, Ritter, and Zhao, supra at note 6.
    20. Se
    Chemicals and
    Allied Products
    1.05 – 1.54 2.74 – 4.99 1.69 – 3.55
    Computers & Office
    Equipment
    0.94 – 1.15 1.85 –2.72 0.91 – 1.57
    Auto & Aircraft
    Manufacturing
    0.94 – 1.08 1.41 – 1.94 0.47 – 0.86
    Communications 1.01 – 1.20 1.82 – 2.39 0.81 – 1.19
    Retail – Depart-
    ment/Variety.
    0.91 – 0.96 1.35 – 1.76 0.44 – 0.80
    Real Estate 0.86 – 0.92 1.36 – 1.82 0.50 – 0.90
    Business Services 1.09 – 1.34 2.46 – 3.87 1.37 – 2.53
    Professional
    Services
    1.13 – 1.14 2.62 – 3.46 1.49 – 2.32
    Figure 5 Median Annual Q-Ratio in
    Ten Industries
    Early Period (1966-1989) Compared to
    Later Period (1990-2013)
    Industry Median Annual Tobin’s Q Ratio
    Agriculture – Crops 1.18 – 1.08
    Oil and Gas 1.38 – 1.36
    Chemicals and Allied Products 1.57 – 2.71
    Computers & Office Equipment 1.23 – 1.57
    Auto & Aircraft Manufacturing 1.10 – 1.33
    Communications 1.29 – 1.57
    Retail – Department/Variety. 1.06 – 1.24
    Real Estate 1.03 – 1.15
    Business Services 1.50 – 2.14
    Professional Services 1.57 – 1.77
    Tobin’s Q ratio is the ratio of market value of assets to book value of assets. Market
    value of assets is the sum of book value of assets and market value of common stock less
    the sum of book value of common stock and deferred taxes.
    15 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    The Role of Private Equity. In some cases, the buyers
    of public companies (or their assets or divisions) have been
    other public companies. But in other cases, the buyers of
    public companies—and especially their “underperforming
    divisions”—have been private equity firms.
    Consistent with Jensen’s prediction in 1989, during the
    last 25 years, leveraged private
    of 2007, the global volume of announced private equity deals
    approached $400 billion, accounting for almost 30% of a $1.4
    trillion global M&A market. And before the onset of the
    current credit crunch in the summer of 2007, the abundance
    of low-cost financing was making it very difficult for corpo-
    rate buyers to compete with “financial” buyers in not just
    traditional “cash-cow” industries, but areas like health care,
    energy, and technology that were previously thought to be
    “unleverageable.”
    During the financial crisis that followed, private equity
    firms were forced to undertake a massive restructuring of
    many of their portfolio companies. But after working down
    the mountain of maturing debt that was widely believed
    to threaten its existence, the industry has rebounded with
    remarkable vigor. And for the past few years, private equity
    transactions are said to have accounted for about 15-20% of
    total corporate M&A.
    What accounts for private equity’s remarkable success
    and resilience? As Ohio State professor Karen Wruck argued
    in this journal, private equity addresses major conflicts
    between management and shareholders over corporate size,
    the efficiency and value of the acquired firm is based on the
    new team’s (or their backers’) willingness to pay a significant
    premium over market to acquire control.
    The main actors during the leveraged takeovers and buyouts
    of the 1980s were activist investors (also known as “corporate
    raiders”) like Boone Pickens and Carl Icahn. But after the
    combined forces of recession and regulation effectively shut
    down the leveraged deals that proliferated during the second
    half of the 1980s, the 1990s saw the emergence of U.S. institu-
    tional investors as important players in the market for corporate
    control. Addressing the “collective action” problems faced by
    individual investors, control-minded institutional investors such
    as Blackrock teamed up with pension funds (like CalPERS),
    and hedge funds to exert pressure on companies to increase their
    profitability and value. Though institutional investors clearly
    exhibit very different levels of activism, it’s important to recog-
    nize that, by the end of 2010, they collectively owned about
    70% of the shares of U.S. non-financial public corporations,
    up from about 20% ownership in 1980. 25
    One of the major effects of such growing institutional
    ownership has been a notable shift in the design of top
    management compensation toward stock options and,
    more recently, restricted stock. 26 Stock-based management
    compensation has arguably created stronger incentives for
    managers to increase value by selling or spinning off assets
    that are clearly worth more outside than inside the firm
    (“addition by subtraction”). The fact that the premiums paid
    to selling companies’ shareholders are often 40 to 50 percent 27
    over current market price helps explain the pressure to sell
    underperforming businesses or assets now coming from the
    growing number of institutions and investor activists. But in
    combination with these pressures, the increase in stock-based
    incentives also makes it clear why top managers have become
    more receptive to such offers.
    T
    ake the case of Clayton & Dubilier’s buyout of lawn care
    company O.M. Scott from the conglomerate ITT in
    the late 1980s. After taking control of the company, C&D
    set up a five-person board consisting of Scott’s top manager
    under ITT, three C&D partners, and an outside director
    with operating experience. The C&D partners represented
    over 60% of the equity, while management and employees
    held an equity stake of 17.5%. Before the buyout, Scott’s
    top executive was one of many division managers in ITT’s
    consumer products group who reported a few times a year
    to ITT headquarters and whose “equity” consisted of stock
    options in ITT (which was governed by an 11-person board
    with combined stock ownership of just 0.6%). After the
    buyout, Scott’s manager was the CEO and 10% owner of
    a standalone company, reporting at least weekly to a board
    representing 70% of the stock.
    Clayton & Dubilier
    25. See Roni Michaely, Jillian Popadak, and Christopher Vincent, “The Deleveraging
    of U.S. Firms and Institutional Investors’ Role,” available at http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=1941902.
    26. See in this issue, Michael Mauboussin and Dan Callahan, supra note 5.
    27. Id.
    28. Wruck, supra note 4. See also Huimin Li, The Evolution of Family Firms: The Exit
    of Founding Families and the Survival of Family IPOs, Dissertation, Georgia State Uni-
    versity, 2014, available at http://scholarworks.gsu.edu/finance_diss/26.
    16 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    risk-taking, and payouts through three main features: high
    leverage, concentrated ownership (made possible by the lever-
    age), and vigorous oversight of top management by a small
    and intensely interested board of directors.
    What does the post-crisis resurgence of private equity
    say about the future of U.S. public companies? The main
    message coming out of academic research in this area is that,
    although private equity has made major incursions into areas
    once dominated by public equity, the economic functions of
    private and public equity are better viewed as “complements”
    than mutually exclusive “substitutes”—that is to say, there is
    room for public as well as private companies. And perhaps
    even more important, the governance and performance of
    public companies are improving as a result of the success and
    influence of private equity.
    The future projected by Wruck and most finance schol-
    ars is one in which public companies continue to prevail in
    control contests involving large synergies between buyer and
    seller, and where the risk-bearing benefits of public ownership
    are greatest—namely, in “riskier industries with significant
    economies of scale and growth opportunities requiring large,
    ongoing investment and infusions of equity.” 28 But in the
    meantime, private equity will continue making inroads into
    mature industries (think about Dell and PCs) with “relatively
    stable cash flows, limited growth opportunities, and modest
    ongoing investment and capital-raising requirements.”
    Wruck also notes increasing signs of collaboration or
    “convergence” between private and public equity. Private equity
    firms have increasingly been taking minority equity stakes
    (called PIPES) in public companies, resulting in significant
    improvements in such companies. And many public compa-
    nies have continued, and will continue, to take pages out of the
    private equity playbook, as reflected in increased payouts, stron-
    ger equity incentives for managers, and smaller, more effective
    boards of directors—all of which bodes well for the productivity
    and competitiveness of U.S. public companies.
     
    First, the technology boom that drove large-tech firms’ valua-
    tions skyward through the mid-to-late 1990s collapsed in
    2000-2002. During the run-up in stock prices, a number
    of firms were serial acquirers and innovators in off-balance
    sheet financing. While stock prices rise, the level of happi-
    ness among investors tends to rise as well. When returns go
    negative, there is considerable unrest, and the search begins
    for those responsible.
    Enron, WorldCom, and Tyco were the regulatory poster
    children for the busting of the first bubble. Issues included
    the use of aggressive merger and acquisition accounting,
    off-balance sheet entities, and complex derivatives to increase
    reported earnings and assets, while reporting lower expenses
    and hiding liabilities. The regulatory aftermath was the
    Sarbanes Oxley Act (SOX) and related stock exchange rules.
    These regulations attempted to strengthen the audit function
    by adding mandatory levels of independence and competence,
    as well as rules surrounding conflicts of interest. 29
    By the latter part of the last decade, the real estate bubble
    had burst. The regulatory reaction was Dodd-Frank, another
    omnibus piece of governance legislation containing an array of
    requirements promoting financial stability, while addressing
    governance shortfalls by provisions supporting whistleblow-
    ers, and requiring votes on executive compensation. 30
    Have the Federal forays into corporate law tipped the
    needle against being public? Research suggests that for the
    smallest public firms, the direct costs are significant. 31 While
    Gao, Ritter, and Zhao argue that regulation is not the primary
    reason for the decline in public corporations, they rely solely
    on data they can observe. 32 But a significant proportion of the
    costs of regulation for public firms may well be unobservable.
    These can take the form of management time, distraction, lost
    opportunity from dealing with sets of one-size-fits-all rules,
    and concerns about the impact of future changes in both the
    regulations and the enforcement of them.
    The world of communications has also changed a great
    deal since the late 1980s. First of all, modern communications
    technology makes it difficult not to have a stock quote in front
    of you during each moment you are awake (CNBC anyone?).
    “Evaluation horizons” have clearly become shorter for not only
    retail investors in stocks but for institutions who compete
    in what might be described as annual (or even quarterly)
    “performance tournaments.” As a consequence, the myopia
    of public companies is suspected to be real and growing. In
    a study of public and private U.S. companies by John Asker,
    Joan Ferre-Mensa, and Alexander Ljungqvist, the authors find
    that private companies invest “substantially” more than public
    29. Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30,
    2002. For a critique, see Romano, Roberta. “The Sarbanes-Oxley Act and the Making of
    Quack Corporate Governance.” Yale Law Review 114, (2005), pp. 1521-1610.
    30. For a summary, see Dodd-Frank Wall Street Reform and Consumer Protection Act
    (2010), available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.
    31. See Linck, J. S., J. M. Netter, and T. Yang. “The Effects and Unintended Conse-
    quences of the Sarbanes-Oxley Act on the Supply and Demand for Directors.” Review of
    Financial Studies 22,(2009), pp. 3287-3328.
    32. See Gao, Ritter, and Zhao, supra note.6.
    33. John Asker, Joan Ferre-Mensa, and Alexander Ljungqvist, “Corporate Investment
    and Stock Market Listing: A Puzzle?,” forthcoming in the Review of Financial Studies.
    1
    Thanks to this winnowing process, the public company selec-
    tion towards winners is becoming stronger over time.
    The public company U.S. market has also become
    increasingly subject to global forces. Global competition is not
    new to the U.S. But in the last 25 years, the world’s product
    markets have become significantly more competitive. Many
    of the formerly centrally planned economies have engaged
    in privatization ranging from the “Big Bang” approaches
    in Eastern Europe and Russia to gradual privatization
    in China. At the same time, a number of countries with
    market economies, such as South Korea, have developed
    and refined economic models in which the business and
    government sectors are very close to each other. 36 While
    government controlled businesses can be very inefficient,
    some government-subsidized businesses have demonstrated
    their ability to become effective competitors in the global
    marketplace. 37
    Domestic and Multinational Leverage. What do these
    two trends mean for the public C-Corporation? The growth
    of MNCs (and SOEs) suggests that many public corpora-
    tions now exercise degrees of power or influence that blur the
    lines between private business and government. In the global
    economy, comparative advantage in a number of sectors
    now rests on the leverage brought about by the enormous
    scale and scope of these corporations. In this section, I will
    describe four aspects of this leverage that speak not of eclipse,
    but of evolution toward even greater corporate global power.
    companies, and that private companies are nearly four times
    as responsive to perceived investment opportunities. 33
    For public companies, the window to demonstrate strong
    stock performance does not stay open long before restructur-
    ing pressure begins. The result is an end-game strategy for
    non-winners in public company tournaments. Restructure to
    emphasize returns (i.e., cut costs), be acquired, or go private.
    As argued above, this operation of the market for corporate
    control may indeed be efficient. However, the relentless short-
    term pressure in the public company world tips the needle
    toward another structure.
    Second, the media-saturated economy often casts the public
    company “winners” in a less than favorable light. Consider the
    issue of public-company CEO pay in the current environment
    of high un(under)employment and stagnant overall wage
    growth. Setting aside the issue of whether the “CEO is worth
    it,” the populism that communications technology leverages is
    a growing challenge for public firms. 34 Being privately owned
    does not immunize a firm from this treatment, but it certainly
    reduces the exposure to negative press.
    The Rise of the Public Corporation
    Having examined the evidence of a shrinking public corpo-
    rate sector, let’s now turn to the growth aspect—of which
    there is also impressive evidence.
    While public company numbers may be down markedly
    from the peak, the market capitalization of public compa-
    nies is not. Based on data from the World Bank, the market
    capitalization of publicly traded stocks in the U.S. in 1990
    was $2.0 trillion; and by 2012, that figure had grown to $18
    trillion. Thus, there is little sign of an eclipse in terms of
    market capitalization.
    In this section, I offer two perspectives. First, I return to
    the ROE and Q analysis of the prior section and discuss the
    implications of strong performance. Second, I examine how
    the public corporation form can leverage “winners” in both
    a domestic and multinational context.
    Strong Performance. In the ROE and Q analysis
    presented earlier, one common theme was the growing inter-
    quartile range in performance over time. One reason that the
    interquartile range can grow is that the winners are getting
    stronger. As reported earlier in Figure 4, in seven of the ten
    industries in my study, the median 75th percentile ROE was
    higher in the later period (1990-2013) than the earlier period
    (1966-1989)—even as the median ROE was falling in nine
    out of ten industries. So if there is some downward bias in the
    distribution of profitability over time attributable to changes
    34. The challenge is similar to the one Jensen (1991) describes in reference to media
    attacks on LBOs. See Jensen, supra, note 2.
    35. One might argue that there is an upward time bias in Q. For example, the cost of
    capital has declined in the latter half of the sample period due to declining interest rates,
    thus inflating Qs. However, the increase in Q at the 75 th percentile in the latter period is
    still sufficient to widen the interquartile range in nine of the ten industries over time (as
    Figure 6 shows).
    36. See, e.g., Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Gov-
    ernance Affect Firms’ Market Values? Evidence from Korea, Journal of Law, Economics
    and Organization 22 (2006), pp. 366-413 (2006).
    37. See Tim, Hepher, U.S. to rap European Union over compliance in Airbus subsidy
    dispute, Reuters, April 16, 2013.
    18 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    The first aspect of this leverage is financial, and based on
    tremendous balance sheet strength. Summarizing a number
    of studies showing the declining profitability of small firms
    over the last few decades, Gao, Ritter, and Zhu point to
    three factors: technology, globalization, and reductions in
    consumer search costs. Each of these factors is a magnifier
    of advantage, leading to a “winner-take-all tendency.” 38 In
    this environment, MNC and SOE financial strength and size
    permit them to “buy” instead of “build” and stay ahead of
    rapidly changing markets. Financial strength itself has been
    magnified in the environment of low nominal interest rates
    that has prevailed over for much of the last two decades. In
    recent years, interest rates have plummeted as central banks
    have engaged in efforts to stimulate weak economic growth.
    Financially strong corporations have been able to obtain
    (and refinance) large amounts of debt capital at extremely
    attractive rates and terms. One example is Verizon’s “record
    breaking” $49 billion debt offering in 2013, which was
    followed in 2014 by the sale of ten-year fixed rate debt at
    1.35% annual interest. 39
    Beyond the sheer magnitude of financial capital
    required to compete successfully in the global marketplace,
    political contacts fuel the “winner-take-all” world. For large
    international projects, the political connections necessary
    to gain assurances regarding a range of issues, such as
    employment terms or environmental rules, typically reside in
    only a very small number of firms. To cite just one example,
    John Chambers of Cisco is known for negotiating with
    high-level government officials when proposing overseas
    operations or sales. 40
    The second aspect of leverage is the global nature of the
    corporate structure itself. Unlike the uncorporate structures,
    the corporate form “scales” very well across international
    boundaries. While there are certainly different governance,
    exchange listing, and tax rules for public companies that
    operate in different countries, the corporate structure is the
    global standard for business. Structures like the MLP or
    REIT tend to be suited only for specific tax jurisdiction, and
    cannot be “transported” readily across national boundaries.
    The third element of this leverage is tax. The U.S.
    corporate tax rate of 35% is a massive outlier. Thus, the
    “wedges” in tax rates across countries offer valuable real
    options for MNCs to structure dealings so as to minimize
    their U.S. corporate tax burden. For example, although
    Apple is best known for its innovative products, it has
    also achieved considerable notoriety for its prowess in tax
    avoidance. Apple headquarters some of its operations in
    Ireland, which has a 12% corporate tax rate (as compared
    to 35% in the U.S.), thus taking advantage of an array of
    innovative tax strategies such as “the Double Irish.” 41 More
    broadly, Reuters has estimated that 37 of the top technology
    firms in the U.S. pay an average tax rate of 6.8% on their
    non-U.S. earnings. 42
    In 2010, the Government Accountability Office
    estimated that MNCs paid an average tax rate of 12.6%,
    accomplished largely by “stashing” cash abroad. 43 According
    to Bloomberg, MNCs have accumulated $1.95 trillion
    outside of the U.S. What’s more, in one year three U.S.-based
    companies—Microsoft, Apple, and IBM—accounted for
    almost 20% of the increase in total U.S. corporate overseas
    cash holdings. 44 Viewed in this light, the recent attempts of
    U.S. companies to shift their headquarters overseas through
    highly controversial “tax inversions” are just another (albeit,
    extreme) form of the tax-minimizing search for lower-tax
    jurisdictions. 45
    More generally, the growing size and complexity of the
    regulatory interface between business and government also
    favors large corporations, which have the scale to make the
    largest political contributions as well as employ the best
    legal and accounting advisors. There is academic evidence
    that these expenditures pay off handsomely. Recent studies
    have shown a strong positive association between corporate
    political contributions and stock returns. 46 And according
    to one estimate, the return to lobbying expenditures has
    exceeded $220 for every dollar spent on lobbying. 47
    From 1990 to 2013, the number of pages of rules in
    the Federal Register has grown from 14,179 to 26,417, an
    increase of over 85%. As the number and complexity of rules
    and regulations has grown over time, the ability to perform
    efficiently demands access to government officials who can
    (and will) make decisions. Beyond lobbying for change to
    the rules, the MNC comparative advantage may also be the
    preferred access to reviewers and regulators who can cut
    through the red tape.
    38. See Gao, Ritter, and Zhu, supra note 6.
    39. See http://www.bloomberg.com/news/2014-10-22/verizon-said-to-plan-four-
    part-bond-sale-to-refinance.html.
    40. See Mehak Chawla, “Cisco CEO John Chambers thinks Prime Minister Narendra
    Modi can ‘turnaround’ India” ECONOMICTIMES.COM Aug 14, 2014, available at http://
    articles.economictimes.indiatimes.com/2014-08-14/news/52807718_1_cisco-ceo-
    john-chambers-china-and-india-key-emerging-markets.
    41. See “Double Irish with a Dutch Twist,” New York Times, April 28, 2012,
    available at http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-
    With-A-Dutch-Sandwich.html?_r=0.
    42. See Tom Bergin, It’s Not Just Google, July 23, 2013, available at http://graphics.
    thomsonreuters.com/13/07/BIGTECH-TAXES.pdf.
    43. See Andrew Ross Sortkin, “Tax Load Lighter than It Looks,” New York Times,
    August 31, 2014.
    44. See Richard Rubin, Cash Abroad Rises $206 Billion as Apple to IBM Avoid Tax.
    M
    Second, the pressure on public companies brought about
    by the combination of a competitive product market and a
    vigorous market for corporate control will continue. And as a
    consequence, the number of publicly traded corporations will
    continue to fall. As the last two decades have witnessed, some
    of this decline will be the loss of the “public” part as some of
    The Evolution of the Public Corporation—
    The Next 25 Years
    In this final section, I will start by summarizing the argu-
    ments made in the article and then close by offering my
    thoughts about the next 25 years for the public corporation.
    Summary. Over the past 25 years, the public corpora-
    tion has been eclipsed in some respects while thriving in
    others. Measured by the number of publicly traded compa-
    nies, the organizational structure is in serious decline.
    In each of the ten industries I examined, the number of
    public firms has peaked years ago; and measured from each
    industry’s peak to year end 2013, the number of public
    corporations in the sample of ten representative industries
    has declined by about 60%.
    I offered several reasons for the decline in numbers of
    public corporations. First is the growth of public uncorporates,
    like MLPs and REITs, which have rules and incentives to
    distribute cash instead of retaining it. These uncorporate
    forms are a good match for a growing clientele of investors
    who need current income, given demographic shifts and the
    decline in private and public pensions. Second is the growth in
    the vigor and depth of the market for corporate control, which
    when coupled with the highly competitive global product and
    service markets and management’s stronger equity-based-
    compensation incentives (to sell out for a premium), has
    led to a “thinning of the herd” of public companies. Third
    is the major change in the regulatory and communications
    environment of the public corporation—an environment
    whose main features are (1) a dramatically expanded, one-size-
    fits-all substantive federal regulatory regime, and (2) a degree
    of media saturation that ensures that populist issues like
    executive pay get dragged into the spotlight.
    But while the number of public companies has fallen,
    the market capitalization of those that remain has rocketed
    upward. While the number of public companies has
    dropped by roughly half over the past twenty years, the
    market capitalization has increased by approximately a
    factor of ten. The top public MNCs of the present day are
    some of the most influential organizations not only in the
    U.S., but around the globe.
    In sum, the public corporation has not been eclipsed, it
    has evolved. Successful MNCs have levered public corpora-
    tion status in several ways. First is the economic leverage
    of the public capital markets, which has helped companies
    amass the balance sheets to execute large projects. Second,
    MNCs have shown their ability to leverage relationships,
    particularly with governments, both overseas as well as at
    home. Third, MNCs have levered the ability to arbitrage tax
    rules across countries.
    48. Ciccotello and Muscarella, supra note 10.
    49. The “Halloween Massacre” is an example of a decisive action by a government
    concerned about the proliferation of uncorporate forms—in this specific case, income
    trusts. Taken over a weekend in 2006, this measure effectively preempted the risk of a
    large scale-migration by Canadian public corporations to the trust form in order to avoid
    entity level taxation. See Barbara Balfour, “The income trusts ‘Halloween massacre’:
    handling the fallout one year on,” The Lawyers Weekly, September 14, 2007, available
    at http://www.lawyersweekly.ca/index.php?section=article&articleid=538.
    20 Journal of Applied Corporate Finance  • Volume 26 Number 4  Fall 2014
    these companies will be taken private or acquired by another
    public firm. And some will be the loss of the “corporate” part
    (as in a conversion from corporate to REIT structure).
    Third, the market for corporate control will continue
    to evolve. While the number of public corporations has
    been declining over the past two decades, the number
    and size of institutional investors and activist hedge funds
    continue to grow. Many of these institutions practice active
    management, through either a search to uncover information
    that identifies mispriced securities or engagement in
    actual corporate control activities. But active investment
    management is under increasing pressure from ultra-low
    cost index investing, as evidenced by the rapid growth of
    exchange-traded funds. Active management that focuses on
    the market for corporate control will remain a strategy for
    a number of institutions. Since the public companies that
    remain have higher Q ratios than in the past, the “lower
    hanging fruit” is arguably gone. Going forward, realizing
    returns to activism will thus become a more challenging
    proposition as a larger number of activists chase a smaller
    number of more fairly-valued targets.
    For a number of institutional investors, beating their
    performance benchmarks over short-term horizons is very
    important. And they transmit that pressure by putting the
    heat on management to perform in the short run. In the
    past decade, this has meant a lot of cost cutting by public
    companies to support earnings growth in a low top-line
    growth environment. The effect of such pressure on the
    long-run competitiveness of U.S. companies is an open
    question. To the extent that institutional investors are able
    to extend their investment horizons and free themselves
    from a short-term focus, the pressure on public corporations
    for near-term gains at the expense of longer-run value may
    decline. Larry Fink’s letter to CEOs about the primacy of
    long-term value creation is a marker for what could be a
    dramatic evolution in the nature of investor activism in the
    coming decades. 50
    Fourth, the public company environment will continue to
    become more challenging as growing resentment of winners
    and intensifying focus on isolated anti-social corporate acts
    (that are attributed to public companies as a whole) continue
    to be fueled by media saturation. Some companies will find it
    better to move out of the spotlight. But others will crave the
    attention that media saturation brings. And another major
    market correction in the U.S (triggered in whole or in part by
    a suggestion of corporate malfeasance) could lead to another
    omnibus regulatory package. This would raise the costs of
    staying (or becoming) public, and thus accelerate the decline
    in the number of public companies on the margin.
    Fifth, a small number of “superstar” firms will increase
    their dominant positions and lever their advantage through
    political as well as economic means. Public corporations such
    as Apple, Exxon, and many other highly regarded S&P 100
    firms transcend political boundaries and now constitute the
    most efficient (and powerful) organizations on the planet. On
    a global scale, the rise of these MNCs along with the birth
    of publicly traded SOEs from formerly centrally planned
    economies have put the public corporation squarely at the
    intersection of government and business. Consider the recent
    comment by George Washington University law professor
    Jeffrey Rosen: “As Facebook and Twitter have become the
    public squares of the digital age, their censors now have more
    power over the future of privacy than any king or president
    or Supreme Court justice.” 51
    The power and efficiency of the world’s largest MNCs
    place them in extraordinary positions vis-à-vis government.
    In industries that contract directly with the government, such
    as defense, there are often only one or two viable vendors for
    large purchases. On an operational basis, high-tech MNCs
    now rescue government from information system challenges
    that have become incredibly large and complex (e.g., health-
    c
    Stanford University
    Amar Bhidé
    Tufts University
    Michael Bradley
    Duke University
    Richard Brealey
    London Business School
    Michael Brennan
    University of California,
    Los Angeles
    Robert Bruner
    University of Virginia
    Christopher Culp
    University of Chicago
    Howard Davies
    Institut d’Études Politiques
    de Paris
    Robert Eccles
    Harvard Business School
    Carl Ferenbach
    Berkshire Partners
    Kenneth French
    Dartmouth College
    Martin
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