Why do University Endowments Invest so Much in Risky Assets?

Abstract:     
Maintaining a large endowment invested in risky securities requires a university to forego expansion through internal projects. We capture this trade-off by defining a university objective function that balances the demands of altruistic stakeholders to expand against those of self-interested stakeholders to maximize their lifetime payments. We show that a risky and large endowment signals a combination of three university characteristics: low productivity marginal internal projects; self-interested stakeholders resisting productive expansion; or binding constraints on maximum endowment payouts. Our model demonstrates that endowments offer a window into university fundamentals, and it helps explain the empirical heterogeneity in asset allocations and sizes.

Number of Pages in PDF File: 64

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

JEL Classification: G11, G32, G23

working papers series