Competition with the Private Universities & Endowments

A recent working paper from the National Bureau of Economic Research suggests that private universities react asymmetrically to shocks to their endowments. In particular, they overreact to negative shocks by cutting their operating budgets. That may suggest that, in the aftermath of their recent big financial losses, the privates were not as aggressive in raiding UC as they could have been but also that this effect is likely to wear off. That is, the endowment-loss effect may have shielded UC for a time, but we cannot count on it continuing.

Below is a summary of the paper:

Why I Lost My Secretary: The Effect of Endowment Shocks on University Operations

Jeffrey Brown, Stephen G. Dimmock, Jun-Koo Kang, Scott Weisbenner

NBER Working Paper No. 15861
Issued in April 2010

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.

The paper is available at:
http://www.nber.org/papers/w15861.pdf