Abstract

http://ssrn.com/abstract=1787372
 


 



Why are University Endowments Large and Risky?


Thomas Gilbert


University of Washington - Department of Finance and Business Economics

Christopher M. Hrdlicka


University of Washington - Michael G. Foster School of Business

April 11, 2014


Abstract:     
We model universities as producers of social dividends to analyze their chosen endowment size and asset allocations. As producers, universities take risk by investing in internal projects that generate a stochastic stream of donations or by investing externally in financial markets. If the university's decision makers maximize total output, then the more productive the internal projects, the smaller the endowment is, since the university primarily invests internally in new projects. If instead the decision makers maximize a pro rata payment, then they choose not to invest internally and the endowment is risky and grows without bound. Adding the UPMIFA-mandated 7% maximum endowment payout constraint does not induce internal investment in universities that value pro rata payments. The constraint actually limits all universities' ability to buffer adverse shocks with their endowment, which increases the volatility of their internal capital stock. In addition, the constraint prevents universities from converting new resources into internal capital quickly, leading to larger and riskier endowments, and lowering the growth rate of the most productive universities.

Number of Pages in PDF File: 68

Keywords: University endowments, portfolio choice, investment policy, governance, agency, UPMIFA

JEL Classification: G11, G32, G23

working papers series


Download This Paper

Date posted: March 19, 2011 ; Last revised: April 12, 2014

Suggested Citation

Gilbert, Thomas and Hrdlicka, Christopher M., Why are University Endowments Large and Risky? (April 11, 2014). Available at SSRN: http://ssrn.com/abstract=1787372 or http://dx.doi.org/10.2139/ssrn.1787372

Contact Information

Thomas Gilbert (Contact Author)
University of Washington - Department of Finance and Business Economics ( email )
Box 353200
Seattle, WA 98195
United States
206-616-7184 (Phone)
HOME PAGE: http://faculty.washington.edu/gilbertt/
Christopher M. Hrdlicka
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 681
Downloads: 135
Download Rank: 120,451

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.593 seconds