Looking at Figure 4.6, describe the trend in gross public equity issues and IPOs

Question

Looking at Figure 4.6, describe the trend in gross public equity issues and IPOs in the U.S. during the last 30 years. How do you explain this trend given what we observe in Figure 4.5?

Gross New Stock Issues by Corporations and Initial Public Offerings, 1980-2010 Source: Federal Table 1.46, "New Security Issues U.S. Corporations," various issues, new stock issues by corporations; Jay Ritter, "Initial Public Offering: Tables Updated Through 2010," Table 8. Note: new equity is publicly issued stock including preferred stock. IPOs exclude overallotment options but include the international tranche, if any. FIGURE 4.5 Net New Equity issues, 1975-2010 Sources: Federal Reserve System, Flaw of Funds Accounts of the United States,

Explanation / Answer

Figure 4.6 illustrates that new equity has been an important source to a certain subset of companies characterized primarily by high growth.In most years since 1985, net equity issuance has been negative, meaning U.S. corporations have retired more shares measured in terms of value than they have issued. In aggregate then, new equity has been a use of capital to U.S. corporations, not a source.

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