TABLE OF CONTENTS
Preface
Introduction (Jeffrey R. Brown and Caroline M. Hoxby) - Jeffrey R. Brown, Caroline M. Hoxby
DOI: 10.7208/chicago/9780226201979.003.0010
[keyword not supplied]
Abstract not supplied. (pages 1 - 14)
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1. Endowment Management Based on a Positive Model of the University (Caroline M. Hoxby) - Caroline M. Hoxby
DOI: 10.7208/chicago/9780226201979.003.0001
[endowment, universities, spending rules, human capital, tuition, asset allocation]
I propose a positive model of the university that generates many apparently peculiar features of universities such as endowments and tuition subsidies. The model proposes a specific objective function: a university maximizes its contribution to the intellectual capital of society, valued at social returns. The objective function is enforced within the model-that is, it leads to actions that reinforce the initial selection of the objective function. Endowments also arise naturally within the model: they are a necessary feature of certain universities, not an accident. The model makes important predictions for the decisions that universities should make on many fronts if they are behaving in accordance with it, but I focus on the implications for financial decisions, especially universities’ endowment spending rules and portfolio allocations. The model is designed to explain America’s great private research universities and very selective liberal arts colleges and-with modest adaptations-institutions like America’s and Britain’s great public research universities. An ancillary benefit of the model is that it provides a justification for existence of the aforementioned institutions by assigning them a unique role in the creation of the world’s intellectual capital. (pages 15 - 42)
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2. The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds (Keith C. Brown and Cristian Ioan Tiu) - Keith C. Brown, Cristian Ioan Tiu
DOI: 10.7208/chicago/9780226201979.003.0002
[endowment funds, spending policy, asset allocation, investment performance]
We provide a comprehensive analysis of university spending policies as well as how frequently and why those mandates are revised over time. Given the long-term and relatively static nature of the investment problem faced by the typical educational institution, existing theoretical models of endowment management predict that the permanent portion of the stated spending policy should be highly stable. However, we find that half of the endowments revised their rules at least once and about a quarter of the sample changed their spending policies each year. We show that larger endowments with lower historical portfolio returns and lower past payout levels are more likely to alter their future spending formulas, but that institutions having the ability to invoke special appropriations on a temporary basis are less likely to make adjustments to their permanent rules. Further, we document that both spending rule changes and asset allocation adjustments persist over time and that the former tends to lead the latter. While there is some evidence that endowment funds as a group produce superior returns relative to their policy benchmarks, we show that there is no difference in benchmark-adjusted performance between institutions that either did or did not change their spending rules. (pages 43 - 98)
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3. Competition among University Endowments (William N. Goetzmann and Sharon Oster) - William N. Goetzmann, Sharon Oster
DOI: 10.7208/chicago/9780226201979.003.0003
[universities, asset allocation, alternative investments, herding]
The asset allocation of university endowments has recently shifted dramatically towards alternative investments. This shift left some institutions exposed to the liquidity shock of the Great Recession and exacerbated the effects of that recession on subsequent resource allocation choices. In this paper we examine the role played by strategic competition in motivating this shift. Using a metric capturing competition for undergraduate applications, we test whether endowment performance relative to a school’s nearest competitor is associated with the likelihood of changing investment policy, and conditionally, whether the nature of that change is consistent with the goal of “catching up” to its closest rival. Conditional on indicating a policy change, we find that endowments appear to use marketable alternatives-i.e., hedge funds-to catch up to competitors. More generally, we find evidence that endowments with below median holdings of alternative investments tend to shift policies in that direction. Besides herding behavior we also find trend-chasing behavior. Endowments with recent positive experience with various alternative asset classes tend to increase exposure to them. We consider the long-run implications of this competitive and trending behavior for the ability of endowments to deliver intergenerational equity. (pages 99 - 126)
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4. Keynes, King’s, and Endowment Asset Management (David Chambers, Elroy Dimson, and Justin Foo) - David Chambers, Elroy Dimson, Justin Foo
DOI: 10.7208/chicago/9780226201979.003.0004
[King’s College Cambridge, John Maynard Keynes, behavioral finance, endowment asset management, financial history]
Founded in 1441, King’s College was one of Cambridge University’s wealthiest colleges, endowed with a vast agricultural portfolio. John Maynard Keynes was appointed bursar just after WWI and initiated a major reallocation to equities, an innovation at least as radical as the late 20th century commitment to illiquid assets by Harvard and Yale. Keynes initially pursued a market-timing approach to investment with mixed success and failed to anticipate the 1929 market crash. Thereafter, his switch to a patient buy-and-hold strategy allowed him to maintain his commitment to equities in the subsequent market slump, reflecting the natural advantages that accrue to long horizon investors. Keynes’ innovations in endowment asset management, implemented over a dynamic period of capital market development and economic turbulence remain of great relevance to modern investors emerging from the Great Recession. (pages 127 - 150)
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5. The Supply of and Demand for Charitable Donations to Higher Education (Jeffrey R. Brown, Stephen G. Dimmock, and Scott Weisbenner) - Jeffrey R. Brown, Stephen G. Dimmock, Scott Weisbenner
DOI: 10.7208/chicago/9780226201979.003.0005
[charitable giving, donations, endowments, universities]
Charitable donations are an important revenue source for many institutions of higher education. We explore how donations respond to economic and financial market shocks, accounting for both supply and demand channels through which these shocks operate. In panel data with fixed effects to control for unobservable differences across universities, we find that overall donations to higher education-and especially capital donations for university endowments or for buildings-are positively and significantly correlated with the average income and house values in the state where the university is located (supply effects). We also find that when a university suffers a negative endowment shock that is large relative to its operating budget, donations increase (demand effects). This is especially true for donations earmarked for current use. We conclude by discussing the importance of understanding how donations respond to economic shocks for effective financial risk management by colleges and universities. (pages 151 - 174)
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6. The Impact of the Financial Crisis on Faculty Labor Markets (Sarah E. Turner) - Sarah E. Turner
DOI: 10.7208/chicago/9780226201979.003.0006
[Great Recession, financial crisis, faculty, universities]
The impact of the recent financial crisis-as well as prior cyclical downturns-on faculty hiring and wages is not well understood. An important first step is to document the basic short term relationship between budget cuts, employment levels and wages among different types of colleges and universities. The fiscal crisis brought a collision of contractions in budgets and increased student enrollment demand. As a result, faculty hiring in the junior ranks contracted sharply while student faculty ratios have increased commensurately. The magnitude and duration of these effects differs markedly across institutions. For private research universities that draw substantially on endowment income, the financial crisis produced a short-though significant-shock to revenues and, in turn, hiring. For public universities, the effects of the financial crisis are longer-lasting, with appropriations in many states continuing downward to 2012, and the impact on hiring longer lasting. The Great Recession has further widened differences between public and private universities in faculty staffing and, to some degree, salaries. As student faculty ratios have increased notably at public-sector institutions, it is natural to ask whether this decline in resources per student will adversely affect student attainment and research output in the coming years. (pages 175 - 208)
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7. The Financial Crisis and College Enrollment: How Have Students and Their Families Responded? (Bridget Terry Long) - Bridget Terry Long
DOI: 10.7208/chicago/9780226201979.003.0007
[Great Recession, tuition, student loans, college enrollment, financial aid]
This paper explores how the Great Recession affected college enrollment and costs to families. As with past recessions, reductions in income and increases in tuition prices could have had negative effects on enrollment, while growing unemployment could have had the opposite effect by reducing the foregone costs of attending school. However, the Great Recession occurred within a much more complex postsecondary context than ever before, with the prominence of student loans but the changing availability of debt, a major increase in the number of college-age students, and substantial policy changes in federal financial aid. The net effect of these positive and negative pressures is unclear. Using data from the Integrated Postsecondary Education Data System (IPEDS), an annual survey of colleges and universities, I investigate how the Great Recession affected college enrollment levels, attendance intensity, tuition costs, and financial aid. The analysis suggests college attendance levels increased during the recession, especially in the states most affected in terms of rising unemployment and declining home values, but it was part-time enrollment that grew while full-time enrollment declined. The tuition revenue collected per student also grew, while grants did not offset the increase in cost, and student loan amounts also increased. (pages 209 - 234)
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8. Federal and State Financial Aid during the Great Recession (Eric Bettinger and Betsy Williams) - Eric Bettinger, Betsy Williams
DOI: 10.7208/chicago/9780226201979.003.0008
[Great Recession, Pell Grant, tuition, financial aid]
During the Great Recession, the maximum federal Pell award grew over 32 percent in three years, the fastest rate in its history. Our research examines how states’ need-based financial aid policies responded to the economic downturn and this Pell program. Documenting tends in state and federal policies, we show a pattern that as many as half of the states have reduced the generosity of their financial aid programs during the Great Recession. This pattern of reducing generosity in the wake of increases in the Federal Pell Grant Program is not new, and our research shows that this potential fiscal federalism has become more common since 2000. We highlight specific policies in three states that illustrate this trend. We also use student-level data from Ohio to illustrate how students’ net aid packages changed in response to the combined changes in federal and state aid policy, finding that the state policy had disproportionate effects on the students with most need. (pages 235 - 262)
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9. Did the Fiscal Stimulus Work for Universities? (Michael F. Dinerstein, Caroline M. Hoxby, Jonathan Meer, and Pablo Villanueva) - Michael F. Dinerstein, Caroline M. Hoxby, Jonathan Meer, Pablo Villanueva
DOI: 10.7208/chicago/9780226201979.003.0009
[Great Recession, financial crisis, stimulus, multiplier, Keynesian, flypaper effect, universities, endowment, tuition]
We investigate how stimulus-motivated federal funding directed to universities affected their revenues, expenditures, employment, tuition, student aid, endowment spending, and receipt of state government appropriations. We also investigate how these funds affected the economies of the counties in which the institutions are located. To overcome the potential endogeneity of federal funds, we employ: (i) an instrument that applies nation-wide rates of increase in research funding by agency to universities whose initial dependence on these agencies differs; and (ii) an instrument that applies the change in the maximum Pell Grant to institutions with varying initial numbers of students eligible for the maximum grant. Our results suggest that federal funds induced private universities to increase research, reduce tuition, raise student aid, spend slightly more on many categories of expenditure, and slightly reduce endowment spending rates. These results are consistent with private universities maximizing objectives that require them to allocate funds over abroad array of activities. Our results suggest that public universities used federal funds as leverage to gain independence from state governments-gaining the ability to set tuition closer to market-based rates but losing state appropriations in the bargain. (pages 263 - 320)
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Contributors
Author Index
Subject Index
