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

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

NBER Working Paper No. 15861
Issued in April 2010
NBER Program(s):   AP   CF   ED   PE

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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This paper was revised on August 15, 2012

Acknowledgments

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