ENDOWING THE FUTURE: THE STOCK MARKET, UNIVERSITY ENDOWMENTS, AND INSTITUTIONAL GRANT AID

Abstract

Intergenerational persistence, or lack of mobility, remains a major issue in American society today. In part perpetuated by unequal access to higher education between students of low and high-income backgrounds, increasing low-income student college enrollment can help tackle this problem, particularly through university-level institutional grants. In this paper, I explore the relationship between endowment portfolio return and private university behavior with respect to changes in institutional grants in the context of market return, on both a short- and long-term basis. First, analyzing university return with respect to market return, I find that private university returns are much more correlated with the market, have higher returns, and potentially have more flexibility in pursuing that return, compared to publics. With respect to grants, the results I find are nuanced. Broadly speaking, university investment returns do not affect university decision-making in the short-term, but higher returns are associated with higher annualized changes to institutional grants in the long run. These findings are conditional – wealthy universities appear to respond positively to investment returns, with higher investment returns associated with slightly higher annual changes to grants. I further find that universities have an asymmetric response to negative returns and reduce institutional grant aid in response. Highly market-correlated returns may present an added disadvantage in attracting low-income students due to reduced financial aid. Ultimately, while universities and their endowments are in the unique position to tackle problems of intergenerational persistence directly, they do not demonstrate a clear desire to leverage stronger performance to do so, especially in the short run.