The chart above, excerpted from an article by noted financial analyst Michael Markowski, who predicted the demise of Lehman, Bear Stearns and Merrill Lynch, appears to illustrate that the Dodd-Frank legislation crushed the values of smaller cap companies. Mr. Markowski’s article appears at this link: https://www.equities.com/news/dodd-frank-boon-for-large-caps-bust-for-micro-caps
Is this causation, or merely correlation? We don’t know for sure.
What we do know is that smaller cap public company valuations have diverged markedly from larger cap public company valuations, regardless of the proximate cause. As an investment asset class, they appear to have performed poorly.
Further, to add to the woes of the smaller cap public companies, we also know that the US public markets are generally* inhospitable to smaller cap companies. This inhospitability manifests itself as follows:
(1) Smaller-cap stocks are illiquid
(2) Institutional investors avoid investing in illiquid smaller cap stocks
(3) Smaller-cap companies have little-to-no investment analyst coverage
(4) Smaller-cap companies are starving for capital
(5) Much of the available capital to smaller-cap companies is “toxic”
(5) Gaps in SEC “short” selling regulations enable short sellers unfairly to damage smaller-cap company valuations and the companies themselves
We will review each of these elements of inhospitabililty in subsequent articles.
* Of course, there will be exceptions to the above general principles, particularly if the company is in the biotech or cannabis space.