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Competition Among University Endowments

In: How the Financial Crisis and Great Recession Affected Higher Education

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  • William N. Goetzmann
  • Sharon Oster

Abstract

The asset allocation of university endowments has recently shifted dramatically towards alternative investments. In this paper we examine the role played by strategic competition in motivating this shift. Using a metric capturing competition for undergraduate applications, we test whether endowment performance relative to a school’s nearest competitor is associated with the likelihood of changing investment policy, and conditionally, whether the nature of that change is consistent with the goal of “catching up” to its closest rival. Conditional on indicating a policy change, we find that endowments appear to use marketable alternatives – i.e. hedge funds – to catch up to competitors. More generally, we find evidence that endowments with below median holdings of alternative investments tend to shift policies in that direction. Besides herding behavior we also find trend-chasing behavior. Endowments with recent positive experience with various alternative asset classes tend to increase exposure to them. We consider the long-run implications of this competitive and trending behavior for the ability of endowments to deliver intergenerational equity.

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This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12858.

Handle: RePEc:nbr:nberch:12858

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  1. Josh Lerner & Antoinette Schoar & Jialan Wang, 2008. "Secrets of the Academy: The Drivers of University Endowment Success," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 207-22, Summer.
  2. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
  3. Hansmann, Henry, 1990. "Why Do Universities Have Endowments?," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 3-42, January.
  4. Litvack, James M & Malkiel, Burton G & Quandt, Richard E, 1974. "A Plan for the Definition of Endowment Income," American Economic Review, American Economic Association, vol. 64(2), pages 433-37, May.
  5. Christopher N. Avery & Mark E. Glickman & Caroline M. Hoxby & Andrew Metrick, 2013. "A Revealed Preference Ranking of U.S. Colleges and Universities," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 425-467.
  6. Mary Burke & Tim R. Sass, 2011. "Classroom peer effects and student achievement," Public Policy Discussion Paper 11-5, Federal Reserve Bank of Boston.
  7. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
  8. Dennis Epple & Elizabeth Newlon & Richard Romano, 2000. "Ability Tracking, School Competition, and the Distribution of Educational Benefits," NBER Working Papers 7854, National Bureau of Economic Research, Inc.
  9. Dennis Epple & Richard Romano & Holger Sieg, . "Admission, Tuition, and Financial Aid Policies in the Market for Higher Education," GSIA Working Papers 2003-04, Carnegie Mellon University, Tepper School of Business.
  10. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-98, June.
  11. Stulz, Rene M., 2007. "Hedge Funds: Past, Present, and Future," Working Paper Series 2007-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  12. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
  13. Brown, Stephen J & Goetzmann, William N & Ibbotson, Roger G, 1999. "Offshore Hedge Funds: Survival and Performance, 1989-95," The Journal of Business, University of Chicago Press, vol. 72(1), pages 91-117, January.
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Cited by:
  1. John H. Cochrane, 2013. "Finance: Function Matters, not Size," NBER Working Papers 18944, National Bureau of Economic Research, Inc.

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