Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis
University of Pennsylvania - The Wharton School
August 6, 2009
Stanford Law Review, Vol. 63, No. 5, p. 699, 2011
Rock Center for Corporate Governance at Stanford University Working Paper No. 99
Abstract: The financial crisis of 2008 left elite university endowments with 30% less value, leading these universities to respond with dramatic budgetary restructuring. While endowments had received probing national and Congressional attention in the months prior to the crisis, that attention has largely given way to the conventional wisdom that universities are no longer able to meet their budgetary needs because of these endowment losses. This wisdom has taken hold despite the fact that elite universities still sit atop multi-billion dollar endowments designed, at least in theory, to provide a cushion in times of financial distress.
This Article explores this apparent puzzle by looking at the legal and financial restrictions placed on endowment spending. The Article finds that, arguments to the contrary notwithstanding, the law does not meaningfully restrict elite universities in their spending largely because the law does not apply to unrestricted funds that compose almost half of elite universities’ endowments. A stronger explanation is financial: elite university investment in illiquid assets means that universities cannot cash out endowments to stabilize their budgets because of an inability to access those investments. I argue, though, that that explanation is still inadequate: illiquid investments likely account for a minority of a university’s endowment, and some elite universities have tapped these illiquid funds at “bottom-of-the-market” prices. The Article articulates a different theory of endowment value: universities use their endowments as a symbol of prestige and a point of competition between peer institutions. This cultural value of university endowments means that universities will strive to avoid endowment liquidation to the fullest extent possible, even in times of crisis.
Number of Pages in PDF File: 52
Keywords: university endowments, financial crisis, UMIFA, UPMIFA
Date posted: August 8, 2009 ; Last revised: March 24, 2011