| Abstract: |
Over the past two decades, endowments have become an increasingly important
component of the typical university's resource base. We examine how U.S.
doctoral institutions' endowment payout policies and spending decisions are
affected by financial market shocks to endowments. While most endowments have
formal payout policies intended to smooth payouts over time, we find that
universities are more likely to deviate from these policies following negative
(but not positive) shocks. These negative shocks have important economic
effects on university activities. Specifically, we find that universities with
larger negative endowment shocks are relatively more likely to: (1) reduce
support staff (e.g., secretaries) and maintenance, but not administrators; (2)
among less selective institutions, reduce expenditures on tenure-system
faculty while increasing the average salary of adjuncts/lecturers; (3) make
larger cuts to tenure-system faculty and secretarial support when their
endowment portfolio is less liquid (i.e. higher allocations to alternative
assets such as hedge funds); and (4) among more selective universities, reduce
financial aid for students the following Fall and enroll fewer freshmen. We
also find that universities increase hiring when there are negative endowment
shocks to their peers. Thus, financial shocks have real effects on university
operations, but with cross-sectional variation in how universities respond. |