The Effects of Spending Rules and Asset Allocation on Nonprofit Endowments

Abstract

The long-run impact and implications of an endowment’s spending policy and asset-allocation decisions are examined. Using a dynamic model, the authors explore how different endowment spending rules (SRs) influence the dynamics of an endowment’s size and future spending. They find that different parameters within each SR have significant long-term impact on wealth accumulation and spending capacity. Using Merton’s (1993) endowment model and compiled asset-allocation data, they estimate the intertemporal preferences and risk aversion of several major endowments and find significant variation across endowments in their propensity to increase portfolio risk in response to increased spending needs.