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

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

Endowment payouts have become an increasingly important component of universities' revenues in recent decades. We study how universities respond to financial shocks to endowments and thus shed light on a number of existing models of endowment behavior. 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 whose current value is 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, such as personnel cuts.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 3 (March)
Pages: 931-62

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:3:p:931-62
Note: DOI: 10.1257/aer.104.3.931
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  1. Tobin, James, 1974. "What Is Permanent Endowment Income?," American Economic Review, American Economic Association, vol. 64(2), pages 427-32, May.
  2. Eisner, Robert, 1974. "Endowment Income, Capital Gains and Inflation Accounting: Discussion," American Economic Review, American Economic Association, vol. 64(2), pages 438-41, May.
  3. Core, John E. & Guay, Wayne R. & Verdi, Rodrigo S., 2006. "Agency problems of excess endowment holdings in not-for-profit firms," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 307-333, September.
  4. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  5. Brown, Keith C. & Garlappi, Lorenzo & Tiu, Cristian, 2010. "Asset allocation and portfolio performance: Evidence from university endowment funds," Journal of Financial Markets, Elsevier, vol. 13(2), pages 268-294, May.
  6. Gordon C. Winston, 1999. "Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 13-36, Winter.
  7. Stephen G. Dimmock, 2012. "Background Risk and University Endowment Funds," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 789-799, August.
  8. Nichols, Donald A, 1974. "The Investment Income Formula of the American Economic Association," American Economic Review, American Economic Association, vol. 64(2), pages 420-26, May.
  9. 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.
  10. Hansmann, Henry, 1990. "Why Do Universities Have Endowments?," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 3-42, January.
  11. Charles T. Clotfelter, 1999. "The Familiar but Curious Economics of Higher Education: Introduction to a Symposium," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 3-12, Winter.
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