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Japan overtakes US in listed companies but quality lags

Big differences remain in market discipline and corporate governance

Employees of the Tokyo Stock Exchange work in Tokyo. Japan has more listed companies than the U.S., but total market capitalization is much smaller.   © AP

NEW YORK -- Japan now has more listed companies than the U.S., giving investors plenty of choices. But that does not mean the Japanese market is more attractive than its U.S. counterpart. Rather, it is more a result of the lag in Japan in strengthening market discipline and shaking out lower-quality companies.

At the end of 2017, there were about 3,700 listed companies in Japan, including those listed on regional stock exchanges. The U.S. is in the 3,600s, excluding foreign companies, according to data from Bloomberg and others.

Even though Japan has more listed companies, its total market capitalization is just a fifth that of the U.S.

The number of listed companies in the U.S. peaked at over 7,000 in 1996, but has fallen by almost half in the two decades since, with many more companies delisting than those going public.

The total market capitalization of the surviving U.S. companies has tripled over the past 20 years. While low interest rates have lured investors, progress in improving market quality has also played a key role.

There were nearly 500 initial public offerings per year on average in the U.S. in the 1990s according to a survey of Thomson Reuters. But since 2000, there have only been around 140 per year. The Sarbanes-Oxley Act, introduced in 2002 in response to accounting scandals at U.S. energy company Enron and others, resulted in tighter listing requirements and higher disclosure standards.

About 70-80% of the companies that have delisted were involved in mergers and acquisitions. Shareholders -- especially activist shareholders -- have been raising pressure on management to prop up flagging share prices. Public pension funds have been supporting activist shareholders in this effort.

Long-established companies are no exception. For General Electric, for instance, whose share price has dropped by half in just a year, there are several options, such as going private or breaking up the company, according to an executive at a U.S. investment fund.

This suggests that better market discipline is one reason for the decline in the number of U.S. listed companies. The U.S. market has spent 20 years culling the number of listed companies by prioritizing market quality over giving companies the opportunity to raise funds.

Stronger market discipline and corporate governance help improve corporate value, said Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, the second-largest public pension fund in the U.S.

Japan, meanwhile, is at a much earlier phase of strengthening market discipline, including tightening corporate governance. Work needs to be done to lure more investors.

Many companies are so small they cannot be traded, said a representative of a hedge fund.

There are too many listed companies due to inefficiencies in the process of forcing them out of the market, said a representative of a U.K. investment company. 

The U.S. is starting to worry it has the opposite problem. The government has expressed concern over the declining number of listed companies.

In proposed reforms to financial regulations prepared last year at the direction of President Donald Trump, the Treasury Department included provisions to reduce the obligations of listed companies. The proposals included more lax disclosure rules and restricting shareholders' rights.

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