Featured Research

from universities, journals, and other organizations

Colleges suffer when endowment values wane

Date:
April 26, 2010
Source:
University of Illinois at Urbana-Champaign
Summary:
University investment decisions can deepen job losses and other financial cuts when market collapses carve into budget-supporting endowment funds, a new study has found.

University investment decisions can deepen job losses and other financial cuts when market collapses carve into budget-supporting endowment funds, a new study by the National Bureau of Economic Research found.

Researchers say the findings show that universities need to re-evaluate investment portfolios and policies to cushion the blow when market downturns wither endowments, a growing economic engine for colleges over the last two decades.

"A secretary at Harvard probably had no idea her employment could be tied to how the school's endowment was invested, but that actually turned out to be the case," said University of Illinois finance professor Scott Weisbenner, a co-author of the study.

Many endowments scale back payments to universities more than their own policies dictate when asset values tumble, according to the study, which examined endowments at more than 200 doctoral universities from 1988 to 2008. That, in turn, further shrinks resources available to fund university operations.

Universities typically have policies that set annual payout rates based on a fixed percentage of average fund values over the last three to five years, seeking to provide a stable income stream and avert the dramatic spikes resulting from an especially good or bad financial year, said Jeffrey R. Brown, a U. of I. finance professor and co-author of the study.

But while university endowments follow their policy when strong market performance increases asset values, he said, many scale back payouts beyond what their guidelines suggest the market suffers large declines.

"That means the university budget takes a double hit because not only are asset values declining but they're spending a smaller fraction of the endowment than their own rules say they should," Brown said.

He says the move is puzzling because it defies the mission of endowments, which are designed to provide steady financial support for universities and are larger than annual budgets at most of the schools included in the study.

"It's consistent with the view held by some that rather than trying to preserve a steady stream of income to support the university, endowment mangers may be trying to preserve the size of the endowment for other reasons, such as the prestige of having a large endowment," Brown said.

Other findings include:

• Universities with large endowment declines cut faculty, support staff and maintenance workers, but not administrators. "We found no effect on the number of administrators -- none whatsoever," Brown said. "It's statistically no different than zero."

• Schools made larger cuts to faculty and staff when endowment investment portfolios included riskier, less liquid assets such as hedge funds, private equity and venture capital.

• Universities sought to capitalize when their endowments weathered downturns while their peers took a hit, and hired more tenured and tenure-track faculty the following year.

"Universities don't let a crisis to their peers go to waste," Weisbenner said.

• When endowment values rise, universities with highly selective admissions standards reward tenure-system faculty with pay increases, while less-selective schools boost financial aid for students and give raises to lecturer and adjunct faculty.

"It matches the mission of these two different types of universities," Weisbenner said. "The more selective universities can get top students without financial aid, and are competing for the top research faculty. Less-selective schools won't get the research stars, so they try to get better students."

Brown says the study analyzed endowment data from the technology bubble collapse that sank financial markets in 2001-02, but not from the current economic crisis.

"We have anecdotal and survey data that indicates the current situation is consistent with what we found earlier," he said. "But I would want to wait for data to see if everything we found is going to be mirrored exactly in the current environment."

Brown and Weisbenner hope the findings encourage universities to incorporate appropriate risk-management strategies when making portfolio decisions.

"You can't count on having an up market all of the time," Weisbenner said. "High-reward investment strategies can have a real impact on universities during down markets, including fewer professors and support staff being hired or more being let go."

Brown says the current economic crisis highlights the need for caution, with endowment values declining at the same time that government support and donations sank because of the recession.

"It's not enough to just think about what can go wrong," he said. "You also have to think about the fact that when something goes wrong with the endowment, it is likely to come at a time when it's particularly bad for something to go wrong."


Story Source:

The above story is based on materials provided by University of Illinois at Urbana-Champaign. Note: Materials may be edited for content and length.


Journal Reference:

  1. Jeffrey Brown, Stephen G. Dimmock, Jun-Koo Kang and Scott Weisbenner. Why I Lost My Secretary: The Effect of Endowment Shocks on University Operations. NBER, [link]

Cite This Page:

University of Illinois at Urbana-Champaign. "Colleges suffer when endowment values wane." ScienceDaily. ScienceDaily, 26 April 2010. <www.sciencedaily.com/releases/2010/04/100426131610.htm>.
University of Illinois at Urbana-Champaign. (2010, April 26). Colleges suffer when endowment values wane. ScienceDaily. Retrieved July 24, 2014 from www.sciencedaily.com/releases/2010/04/100426131610.htm
University of Illinois at Urbana-Champaign. "Colleges suffer when endowment values wane." ScienceDaily. www.sciencedaily.com/releases/2010/04/100426131610.htm (accessed July 24, 2014).

Share This




More Science & Society News

Thursday, July 24, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Boeing Ups Outlook on 52% Profit Jump

Boeing Ups Outlook on 52% Profit Jump

Reuters - Business Video Online (July 23, 2014) Commercial aircraft deliveries rose seven percent at Boeing, prompting the aerospace company to boost full-year profit guidance- though quarterly revenues missed analyst estimates. Bobbi Rebell reports. Video provided by Reuters
Powered by NewsLook.com
Thousands Who Can't Afford Medical Care Flock to Free US Clinic

Thousands Who Can't Afford Medical Care Flock to Free US Clinic

AFP (July 23, 2014) America may be the world’s richest country, but in terms of healthcare, the World Health Organisation ranks it 37th. Thousands turned out for a free clinic run by "Remote Area Medical" with a visit from the Governor of Virginia. Duration: 2:40 Video provided by AFP
Powered by NewsLook.com
Six Indicted in StubHub Hacking Scheme

Six Indicted in StubHub Hacking Scheme

AP (July 23, 2014) Six people were indicted Wednesday in an international ring that took over more than 1,000 StubHub users' accounts and fraudulently bought tickets that were then resold. (July 23) Video provided by AP
Powered by NewsLook.com
9/11 Commission Members Warn of Terror "fatigue" Among American Public

9/11 Commission Members Warn of Terror "fatigue" Among American Public

Reuters - US Online Video (July 22, 2014) Ten years after releasing its initial report, members of the 9/11 Commission warn of the "waning sense of urgency" in combating terrorists attacks. Mana Rabiee reports. Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins