Shareholder Value, Ownership Form, and the Transformation of U.S. for-profit Colleges Since 1997

In the wake of massive growth in the for-profit college sector, we have contradictory accounts of schools as either “nimble critters” that fill educational gaps for the underserved (Breneman 2012; Cellini 2010; Deming, Goldin, and Katz 2012; Hentschke, Lechuga, and Tierney 2010) or “agile predators” with a business model for industrial-scale recruitment of federally-subsidized, low-income students  (Mettler 2014:169; U.S. Senate Committee on Health Education Labor and Pensions 2012).  With a few exceptions (Kinser 2006), studies supporting both accounts tend to treat all for-profit colleges as organizationally similar across firms and over time. This approach is consistent with the status attainment tradition in higher education research and its focus on the role of students’ family background in degree attainment over the potential importance of postsecondary institutional characteristics in educational outcomes (Shavit, Arum, and Gamoran 2007; Stevens, Armstrong, and Arum 2008). But are all for-profit colleges really more-or-less the same?

Building on theories of corporate ownership (Fligstein 1993; Jensen and Meckling 1976; Krippner 2011), I show instead that the rise of shareholder value ownership among for-profit colleges fueled the spread of a new business model that is consistent with the agile predators account. To do so, I analyze the activities of all Title IV for-profit colleges since 1997 using an original data set which identifies for each year whether a college was under one of the three possible types of U.S. firm ownership: 1) privately held, 2) private equity, or 3) publicly traded. This analysis reveals that most of the industry’s radical enrollment growth occurred through the spread of private equity and publicly traded ownership under which shareholder value arrangements prevailed.

Campus-level event study and fixed effects models reveal that changing from privately held to private equity or publicly traded ownership tended to involve a shift to a new business model for industrial-scale recruitment of federally subsidized students. Low instructional and student service support under the new industrial-scale recruitment model was in line with shareholder value strategies of cost-cutting (Fligstein and Shin 2007; Goldstein 2012; Gordon 1996). Using the new industrial-scale recruitment model, private equity-financed newcomers focused mostly on for-profits’ historical under-4-year niche, while publicly traded incumbents also expanded into 4-year offerings. Privately held colleges, however, tended to maintain their traditional business model of higher quality vocational-training and job placement at local employers with longstanding ties to the college.

Consistent with pressures for short-term profit maximization under shareholder value (Davis 2009; Dobbin and Jung 2010; Zorn et al. 2005), colleges with private equity and publicly traded ownership allowed increasingly dismal graduation and student loan repayment rates, despite the obvious risks for profits from reputational consequences and regulatory backlash. In contrast, campuses under privately held ownership tended to have better student loan repayment rates than colleges under shareholder value, as well as equivalent or better graduation rates than comparable non-profit and public schools. Additional event study and fixed effects models show negative effects for graduation rates when ownership changed from privately held to publicly traded.

The long-term risks for shareholder value firms with low graduation and loan repayment rates have been most clear in widespread collapse of enrollments and profits under private equity and publicly traded firms since 2011. The fall in enrollment followed federal reregulation of for-profits, legal action by state attorney generals, and widespread negative media attention. At colleges under privately held ownership, however, enrollment held comparatively steady.

The rise and fall of the industrial recruitment model under private equity and publicly traded ownership fits best with institutionalist theories about shareholder value strategies to avoid competition (Fligstein 2001), cut costs (Appelbaum and Batt 2014; Fligstein and Shin 2007), and take risks for short-term profit maximization (Dobbin and Jung 2010). In comparison, agency theory (Jensen and Meckling 1976; Shleifer and Vishny 1997) and accumulation regime theories of shareholder value (Arrighi 1994; Krippner 2005, 2011) particularly fall short in explaining the private equity focus on under-4-year programs and the risks that both private equity and publicly traded firms assumed by overseeing abysmal graduation and student loan repayment rates. All together, the findings provide the first robust evidence for how shareholder value can affect firm behavior in both consumer markets and the private delivery of social programs.