Working Paper: NBER ID: w21951
Authors: Harvey S. Rosen; Alexander J. W. Sappington
Abstract: This paper investigates the decisions of universities to issue debt. We test whether the expected value and uncertainty of a university’s nonfinancial income (the income generated by sources other than its endowment) affect its leverage (the ratio of the value of an institution’s liabilities to the value of its assets). We find that leverage is negatively related to both the expected value and the uncertainty of nonfinancial income. On average, increasing the expected value of nonfinancial income by one standard deviation decreases a university’s debt by about $5.1 million, while increasing the uncertainty of nonfinancial income by one standard deviation decreases debt by about $2.7 million. This behavior is consistent with the pecking order theory of capital structure, which posits that managers deplete available internal funds before issuing debt. We also show that the leverage decisions of universities have become less sensitive to expected nonfinancial income but more sensitive to its uncertainty since the Great Recession.
Keywords: University Debt; Leverage Decisions; Nonfinancial Income; Pecking Order Theory
JEL Codes: I22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Great Recession (G01) | sensitivity to expected nonfinancial income (G19) |
| Great Recession (G01) | sensitivity to uncertainty of nonfinancial income (D89) |
| endowment size (D29) | sensitivity to expected nonfinancial income (G19) |
| endowment size (D29) | sensitivity to uncertainty of nonfinancial income (D89) |
| expected nonfinancial income (G29) | leverage (G24) |
| uncertainty of nonfinancial income (D89) | leverage (G24) |