Small Companies on the Decline, says Zweig

The number of publicly-traded companies has declined by half over the past two decades, with most of the decrease attributed to the smallest companies, writes Jason Zweig in last week’s Wall Street Journal.

Zweig questions, however, whether this is making it more difficult for “stock pickers to beat the market and for investors to forecast future returns from past data,” an assertion the columnist made in an earlier article. Zweig cites comments from AQR partner Ronen Israel: “That part of the universe is so small that it doesn’t really affect most portfolio managers because they can’t invest there anyway.” Israel notes, however, that an exception may be in strategies that “weight stocks equally rather than by size as most indexes do.”

The article says that the new chairman of the SEC, Jay Clayton, has said he “hopes to encourage more small companies to list their shares, at least partly by reducing red tape.” But Jay Ritter, a finance professor at the University of Florida (and a leading authority on initial public offerings), says the decline of small stocks isn’t really news and that regulatory costs “aren’t the main issue.” He argues that small companies are having trouble competing with larger ones, “mainly due to technology and globalization.”