Exchanging Business School Names for Financial Donations
ANN ARBOR, Mich.---A good name, Shakespeare once observed, is the "jewel" of the soul. In the case of U.S. business schools, however, a good name is a valuable asset that can be exchanged for a sizeable financial donation, says Vikram Nanda, associate professor of finance at the University of Michigan Business School.
Nanda and Timothy Burch, a former Michigan doctoral student, studied 57 prominent business schools with MBA programs that were "named" in the 1980s and 1990s after receiving gifts of up to $50 million from donors in order to document patterns affecting the economics of business-school naming.
"Business schools face a trade-off in deciding to develop their resource, in other words, to sell their name now or to wait until a later date," Nanda said. "Schools that delay accepting a naming gift earn a real return for doing so."
Their results, forthcoming in the Journal of Business, reflect the valuation principle established in 1931 by Harold Hotelling in his classic study of exhaustible resources. The findings demonstrate how markets and supply-and-demand forces, which affect the size of financial donations, can develop in unusual places.
Nanda and Burch, now an assistant professor of finance at the University of Miami, found that business schools generally accept a naming gift when the annualized growth rate in gift size is around 5 percent per year, in line with what may be a reasonable estimate of the opportunity costs of capital that schools face.
Evidence further reveals that schools of higher perceived quality (measured by published national business school rankings) are able to command larger naming gifts than those with lower perceived quality. An improvement of 20 slots in a school's Business Week ranking, for example, results in roughly an 18 percent increase in the naming gift it accepts.
In addition, their research shows higher-ranked schools are named earlier than lower-ranked ones, which tend to delay their naming longer. For example, the 21 named schools rated among the top 30 in the 2002 Business Week rankings had a median naming year of 1988, whereas the 24 named schools ranked worse than 50 had a median naming year of 1994.
Lower-ranked schools, Nanda and Burch suggest, may delay their naming in hopes of improving their perceived quality relative to other unnamed schools or because they are reluctant to accept any gift that confirms a lower status.
Interestingly, five of the top 11 business schools in the 2000 Business Week rankings---Harvard, Michigan, Columbia, Chicago and Stanford---are not yet named. The researchers say this may be due to supply-and-demand effects, similar to those that have resulted in fewer namings of medical and law schools, where the potential pool of well-endowed donors and the number of large gift offers are smaller.
"There may be a lack of demand by these top five business schools or a lack of supply of gifts that are sufficiently large to be accepted," Nanda said. "These schools also may have high reservation prices for their names for school-specific reasons."
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