WE RECENTLY examined university business models and the value of them of their endowments. Endowments, which stretch into the billions of dollars for elite institutions, deserve a bit more scrutiny. These cash piles have grown at a fair clip over the last two decades thanks to savvier investments by those that manage these funds. Payouts are an increasingly critical component of university revenue, too. Endowment income supports a wide range of activities from hiring, to facility upgrades and even need-based scholarships. They are generally viewed, not least by donors, as a university’s rainy day fund. Scholars at the University of Illinois and Nanyang Technological University, in Singapore, wondered how endowments have been helping universities to cope with recent economic difficulties. Do they smooth the income universities receive during financial shocks as expected, and are they treated just as another form of income for the university?
When the team looked at how endowments had responded to negative financial shocks during the technology bubble of 2001-2, and the financial crisis in 2008-9, the picture was different than they expected: endowments do not behave as rainy day funds at all. In a forthcoming paper for the American Economic Review (earlier version here), the authors propose that what they see in spending is more consistent with a hypothesis the team terms “endowment hoarding”. When times are bad, leadership is quick to cut the payouts from the endowment to reduce the size of any decline in the overall size of the fund—even though this tends to be contrary to what such funds are expected to do. When times are good payouts do increase, although there is often a slight lag between a bullish turn and increased flow from the tap.