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How University Endowments Respond to Financial Market Shocks: Evidence and Implications

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  • Jeffrey Brown
  • Stephen G. Dimmock
  • Jun-Koo Kang
  • Scott Weisbenner

Abstract

Endowment payouts have become an increasingly important component of universities' revenues in recent decades. We test two leading theories of endowment payouts: (1) universities smooth endowment payouts, or (2) universities use endowments as self-insurance against financial shocks. In contrast to both theories, endowments actively reduce payouts relative to their stated payout policies following negative, but not positive, shocks. This asymmetric behavior is consistent with "endowment hoarding," especially among endowments with values close to the benchmark value at the start of the university president's tenure. We also document the effect of negative endowment shocks on university operations, including personnel cuts.

Suggested Citation

  • Jeffrey Brown & Stephen G. Dimmock & Jun-Koo Kang & Scott Weisbenner, 2010. "How University Endowments Respond to Financial Market Shocks: Evidence and Implications," NBER Working Papers 15861, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15861
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise

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