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A Choice Model of University Endowments Governance

Xiang Gao, Zhenhua Gu and Zhan Wang

Abstract

The board of committees governing university endowments often chooses between hiring professionals to run funds and trusting denoting entities with the funds. As usual, sophisticated fund managers can construct a well-diversified investment portfolio; however, their interests may not be aligned with the university. On the other hand, donors have the advantage of assuming full liabilities for losses, but they only have access to risky projects due to their limitations in terms of accessing the available investment universe. This paper develops a theoretical framework in an attempt to explain the distinct endowment management strategy adopted by universities, and particularly their choice of endowment operator identity. Our model can provide supports to the governance activities practiced by university endowments both in developed and developing countries. Furthermore, we show theoretically that current capital control regulations imposed by the developing country's government reduce donations and encourage universities to establish donor-advised endowment funds, in which donors surrender ownership of anything they put in the fund, but retain control over how their money is invested.

JEL Classification: I23; I28

Corresponding author: Zhan Wang, Research Center of Finance, Shanghai Business School, 2271 West Zhong Shan Road, Shanghai, 200235, PR China, E-mail:

Funding source: Chen Guang project of Shanghai Municipal Education Commission

Funding source: Shanghai Education Development Foundation

Acknowledgments

The authors would like to thank the editor and an anonymous referee for their valuable suggestions. All authors contributed equally.

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Appendix: List of Variables Used in Our Model

ClassificationDescription
FunctionsUtility SpecificationDonoru(xD,xS)=ln(xD)+μln(xS)
Universityw(xS)c=ln(xS)c
Managerv(xF)=κxFv¯
Investment ProjectDonorPDF: g(θD); CDF: G(θD)
UniversityPDF: m(θS); CDF: M(θS)
ManagerPDF: h(θP); CDF: H(θP)
VariablesCons. Var.xDDonor's consumption in period 2
xSEndowments received by university in period 2
xFFund manager's consumption in period 2
Utility function parameterμDonor's degree of care for the university
cMonitoring costs expended in period 2
v¯Manager's reserve utility level
κManager's satisfaction from per unit of cons.
Return Var.θDDonor's unit investment outcome in period 2
θSUniversity's unit investment outcome in period 2
θPManager's unit investment outcome in period 2
θTUniversity's contracting payment with manager
dManager's compensation rate in period 2
Signal Var.θ^Threshold of reported returns inducing monitor
θ^v¯Threshold dependable on the reservation utility
θ^cThreshold dependable on the monitoring cost

Received: 2019-09-07
Accepted: 2020-04-09
Published Online: 2020-07-27

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