Investment Returns and Distribution Policies of Non-Profit Endowment Funds

83 Pages Posted: 5 Dec 2018 Last revised: 18 Sep 2020

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Date Written: September 7, 2020

Abstract

We present the first estimates of investment returns and distribution rates for U.S. non-profit endowment funds, based on a comprehensive sample of 35,262 organizations drawn from Internal Revenue Service filings for 2009-2018, a period that saw a sharp drop followed by a lengthy appreciation in public equity values. Non-profit endowments badly underperform market benchmarks during our sample period. Holding a zero investment portfolio (long endowment and short 60-40 mix of U.S. equity and Treasury bond indexes) generates a mean -4.24% annual return. Regression estimates in four-factor models find statistically significant alphas of -0.83% per year. Smaller endowments have less negative alphas than larger endowments, but all size classes significantly underperform. Distribution ratios are conservative, well below the funds’ long-run returns. Donors increase contributions when endowment returns are strong, with an elasticity of about 0.20 between net-of-market investment returns and new donations.

Keywords: non-profit endowments, institutional investors

JEL Classification: G11, G35, L31

Suggested Citation

Dahiya, Sandeep and Yermack, David, Investment Returns and Distribution Policies of Non-Profit Endowment Funds (September 7, 2020). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 582/2018, Georgetown McDonough School of Business Research Paper No. 3291117, Available at SSRN: https://ssrn.com/abstract=3291117 or http://dx.doi.org/10.2139/ssrn.3291117

Sandeep Dahiya

Georgetown University - Department of Finance ( email )

3700 O Street, NW
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David Yermack (Contact Author)

New York University (NYU) - Stern School of Business ( email )

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United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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