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

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15861.

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Date of creation: Apr 2010
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Publication status: published as Jeffrey R. Brown & Stephen G. Dimmock & Jun-Koo Kang & Scott J. Weisbenner, 2014. "How University Endowments Respond to Financial Market Shocks: Evidence and Implications," American Economic Review, American Economic Association, vol. 104(3), pages 931-62, March.
Handle: RePEc:nbr:nberwo:15861
Note: AP CF ED PE
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  1. Josh Lerner & Antoinette Schoar & Jialan Wang, 2008. "Secrets of the Academy: The Drivers of University Endowment Success," NBER Working Papers 14341, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. 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.
  5. Eisner, Robert, 1974. "Endowment Income, Capital Gains and Inflation Accounting: Discussion," American Economic Review, American Economic Association, vol. 64(2), pages 438-41, May.
  6. Tobin, James, 1974. "What Is Permanent Endowment Income?," American Economic Review, American Economic Association, vol. 64(2), pages 427-32, May.
  7. 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.
  8. Hansmann, Henry, 1990. "Why Do Universities Have Endowments?," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 3-42, January.
  9. 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.
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