To Borrow or Not to Borrow? an Analysis of University Leverage Decisions

45 Pages Posted: 1 Feb 2016 Last revised: 16 Feb 2016

See all articles by Harvey S. Rosen

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Alexander Sappington

Princeton University

Date Written: January 2016

Abstract

This paper investigates the decisions of universities to issue debt. We test whether the expected value and uncertainty of a university’s nonfinancial income (the income generated by sources other than its endowment) affect its leverage (the ratio of the value of an institution’s liabilities to the value of its assets). We find that leverage is negatively related to both the expected value and the uncertainty of nonfinancial income. On average, increasing the expected value of nonfinancial income by one standard deviation decreases a university’s debt by about $5.1 million, while increasing the uncertainty of nonfinancial income by one standard deviation decreases debt by about $2.7 million. This behavior is consistent with the pecking order theory of capital structure, which posits that managers deplete available internal funds before issuing debt. We also show that the leverage decisions of universities have become less sensitive to expected nonfinancial income but more sensitive to its uncertainty since the Great Recession.

Suggested Citation

Rosen, Harvey S. and Sappington, Alexander, To Borrow or Not to Borrow? an Analysis of University Leverage Decisions (January 2016). NBER Working Paper No. w21951, Available at SSRN: https://ssrn.com/abstract=2725762

Harvey S. Rosen (Contact Author)

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Alexander Sappington

Princeton University ( email )

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Princeton, NJ 08544-0708
United States

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