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Economic Budgeting for Endowment-Dependent Universities

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Listed:
  • John Y. Campbell
  • Jeremy C. Stein
  • Alex A. Wu

Abstract

To understand their financial position, universities need to understand the long-term implications of their operating revenues and costs in relation to the financial assets they have available. Standard budgeting procedures that focus on one or two years at a time and use generally accepted accounting principles (GAAP) do not do this. We present an alternative framework that discounts cash flow forecasts over the infinite future and compares the present value of operating obligations to the value of the university’s endowment net of any debt it has issued. We illustrate the potential of this framework using recent data from Harvard’s Faculty of Arts and Sciences (FAS).

Suggested Citation

  • John Y. Campbell & Jeremy C. Stein & Alex A. Wu, 2024. "Economic Budgeting for Endowment-Dependent Universities," NBER Working Papers 32506, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32506
    Note: CF ED PE
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    References listed on IDEAS

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    1. Robert Novy‐Marx & Joshua Rauh, 2011. "Public Pension Promises: How Big Are They and What Are They Worth?," Journal of Finance, American Finance Association, vol. 66(4), pages 1211-1249, August.
    2. Campbell, John Y. & Sigalov, Roman, 2022. "Portfolio choice with sustainable spending: A model of reaching for yield," Journal of Financial Economics, Elsevier, vol. 143(1), pages 188-206.
    3. Hansmann, Henry, 1990. "Why Do Universities Have Endowments?," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 3-42, January.
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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