Why are University Endowments Large and Risky?

Review of Financial Studies, Forthcoming

57 Pages Posted: 19 Mar 2011 Last revised: 27 Jun 2015

See all articles by Thomas Gilbert

Thomas Gilbert

University of Washington - Department of Finance and Business Economics

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Date Written: May 11, 2015

Abstract

We build a model of universities combining their real production decisions with their choice of endowment size and asset allocation. Variation in opportunity cost, that is, the productivity of internal projects, has a first-order effect on these choices. Adding the UPMIFA-mandated 7% payout constraint, the endowment size and asset allocations match those empirically observed. This constraint has little effect on universities that do not value the output of their internal projects but harms those that do: it prevents the endowment's use as an effective buffer stock, thereby increasing the volatility of production, and it slows the growth of the most productive universities.

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

JEL Classification: G11, G32, G23

Suggested Citation

Gilbert, Thomas and Hrdlicka, Christopher M., Why are University Endowments Large and Risky? (May 11, 2015). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1787372 or http://dx.doi.org/10.2139/ssrn.1787372

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)

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