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

44 Pages Posted: 5 Apr 2010

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: April 2010

Abstract

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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Suggested Citation

Brown, Jeffrey R. and Dimmock, Stephen G. and Kang, Jun-Koo and Weisbenner, Scott J., How University Endowments Respond to Financial Market Shocks: Evidence and Implications (April 2010). NBER Working Paper No. w15861, Available at SSRN: https://ssrn.com/abstract=1583802

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Stephen G. Dimmock

National University of Singapore ( email )

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Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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