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

By Jeffrey R. Brown, Stephen G. Dimmock, Jun-koo Kang and Scott Weisbenner


Abstract: Payouts from endowments have become an increasingly important component of the typical university’s resource base over the past few decades. Although endowment payout policies have received theoretical attention from several of the leading minds of the economics profession, the empirical literature is surprisingly thin. In this paper, we provide an empirical test of the two leading theories – that universities smooth endowment payouts or that they use endowments as insurance. We provide evidence that refutes both of these theories: specifically, we find that although most endowments have formal payout policies intended to smooth payouts, endowments actively reduce payouts following negative shocks by more than their own spending rules imply. We discuss how this behavior is consistent with university leadership focusing on the size of the endowment per se, rather than focusing on the endowment as a source of revenue for the university. As further evidence of this, we show that the asymmetric payout behavior is driven entirely by endowments that are within a narrow band around the size that they were at the start of the University President’s tenure, suggesting that this reference point is important for determining payout behavior following endowment shocks. Finally, we document that these payout decisions have a real impact on university operations: specifically, following a negativ

Year: 2012
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