Jeffrey Brown (University of Illinois, Department of Finance), Stephen G. Dimmock (Michigan State University, Department of Finance), Jun-Koo Kang (Nanyang Technological University, Singapore) & Scott Weisbenner (University of Illinois, Department of Finance) have posted Why I Lost My Secretary: The Effect of Endowment Shocks on University Operations on NBER. Here is the 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.
Inside Higher Ed, 'Why I Lost My Secretary':
In the past year, many faculty members and students who never paid much attention to the concept of "endowment payout rates" and their rolling averages have had reason to learn about them. In short, the idea is that colleges and universities shouldn't decide each year what share of their endowments to spend, but should have a standing philosophy on the appropriate payout rate, and should average that rate out over several years to avoid spending too much or too little based on a particularly good or bad financial year.
Of course, that theory sounds much nicer when you are averaging out gains of various sizes than it does for the recent reality of deep losses.
"Why I Lost My Secretary," a study released Monday by the National Bureau of Economic Research, finds that when doctoral universities face negative endowment "shocks" they react in similar ways, not all of them dictated by their endowment payout policies. Many universities appear to make deeper cuts than their endowment payout strategies would call for, the study finds. And there are common patterns in how they adjust spending that may explain (but may or may not justify) why some of the wealthiest universities in the world have been in the uncomfortable position lately of laying off support staff.
(Hat Tip: Danny Sokol.)
