The Influence of Financial Performance on Higher Education Academic Quality

A variety of academic and financial performance metrics are used to assess higher education institution performance. However, there is no consensus on the best performance measures. Signaling theory and agency theory are used to frame the challenges of assessing post-secondary institution performance related to information asymmetry between the institution and stakeholders. Agency costs may be reduced with a better understanding of the relationship among assessment variables. This quantitative study uses multiple linear regressions to identify and describe the relationship between financial performance and academic quality in 1,045 public and private not-for-profit U.S. colleges and universities. U.S. News & World Report rankings serve as a measure of perceived academic quality performance and ratios developed by KPMG and Prager, Sealy & Co., LLC (2005) are used to measure financial performance. Initial findings provide evidence that a large number of schools could be considered financially weak performers. However, results also reveal a positive relationship between financial performance and percieved academic quality in groups with a high concentration of financially strong schools. Findings suggest that financial performance may be used to signal academic performance, reducing information asymmetry and simplifying monitoring of providers. Furthermore, better performance information has potential to inform college choice and, therefore influence access and student success. Recommendations for research, practice and policy have potential to create opportunities for better stakeholder decisions