(Routledge Studies in The Management of Voluntary and Non-Profit Organizations) Inigo Garcia-Rodriguez (Editor), M. Elena Romero-Merino (Editor) - Financing Nonprofit Organizations-Routledge (2020)

Financing Nonprofit
Organizations
The financial issues of nonprofit organizations (NPOs) have increased

their importance in recent years, especially after the last global economic
downturn. In this way, NPOs have been threatened by a reduction of
income, while their work and expenses have not decreased. In this book,
the editors bring together several topics that the academic literature has
previously addressed, connecting them to each other and evaluating
how all these issues are interrelated. Financing Nonprofit Organizations
analyzes the state of art of all these financial topics and the consequences
of the last economic crisis. It dives into the interrelations of these concepts
to suggest lines of future research and to reflect on the future of the
different sources of funding of the NPOs. It will be of interest to students,
practitioners, and researchers interested in initiating and updating their
knowledge in the growing field of the financial aspects of NPOs.
Inigo Garcia-Rodriguez is Assistant Professor of Finance at the University

of Burgos, Spain.
M. Elena Romero-Merino is Associate Professor of Finance at the University

of Burgos, Spain.
Routledge Studies in the Management of Voluntary and
Non-Profit Organizations
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University of Edinburgh, UK
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nificant role, worldwide, in the provision and management of public ser
vices. Drawing together significant and ground breaking research, this
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Financing Nonprofit Organizations

Inigo Garcia-Rodriguez and M. Elena Romero-Merino
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Financing Nonprofit
Organizations
Edited by Inigo Garcia-Rodriguez and

M. Elena Romero-Merino
First published 2020
by Routledge
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Library of Congress Cataloging-in-Publication Data
Names: Garcia-Rodriguez, Inigo, 1987– editor. | Romero-Merino,
M. Elena, 1978– editor.
Title: Financing nonprofit organizations / edited by Inigo
Garcia-Rodriguez and M. Elena Romero-Merino.
Description: New York, NY : Routledge, 2020. | Series:
Routledge studies in the management of voluntary and
non-profit organizations | Includes bibliographical references
and index.
Identifiers: LCCN 2019049342 | ISBN 9780367211042 (hbk) |
ISBN 9780429265419 (ebk)
Subjects: LCSH: Nonprofit organizations—Finance. | Nonprofit
organizations—Management.
Classification: LCC HG4027.65 .F544 2020 | DDC
658.15/224—dc23
LC record available at https://lccn.loc.gov/2019049342
ISBN: 978-0-367-21104-2 (hbk)
ISBN: 978-0-429-26541-9 (ebk)
Typeset in Sabon
by Apex CoVantage, LLC
Contents
Acknowledgements vii
1 A Journey Through the Finance of Nonprofit

Organizations: An Introduction 1
INIGO GARCIA-RODRIGUEZ AND M. ELENA ROMERO-MERINO
PART I
Determinants of Public and Private Income 9
2 Why Do Donors Donate? 11

IGNACIO BRETOS, MILLÁN DÍAZ-FONCEA, AND
CARMEN MARCUELLO
3 Efficiency in Nonprofit Organizations 23

VÍCTOR MARTÍN-PÉREZ AND NATALIA MARTÍN-CRUZ
4 Governance and Its Effect on Philanthropic Income 40

MARC JEGERS
5 Accountability, Transparency, and Voluntary Disclosure

in Nonprofit Organizations 49
MARÍA DEL MAR GÁLVEZ-RODRÍGUEZ, MANUEL LÓPEZ-GODOY,
AND MARÍA DEL CARMEN CABA-PÉREZ
6 Nonprofit Organization Reputation and Its Role

in Success: Antecedents and Effects 62
ESTHER DE QUEVEDO-PUENTE AND CLARA PÉREZ-CORNEJO
vi Contents
7 Crowding-Out or Crowding-In: The Dynamics of
Different Revenue Streams 83
ARJEN DE WIT, RENÉ BEKKERS, AND PAMALA WIEPKING
PART II
Revenues, Funding, and Financial Health 97
8 Revenue Diversification, Growth, and Stability 99

GRACE L. CHIKOTO-SCHULTZ AND NARTTANA
SAKOLVITTAYANON
9 Nonprofit Profits: Slack, Surplus, and Reserves 114

THAD D. CALABRESE AND TODD L. ELY
10 Treasury, Cash, and Liquidity Management in Nonprofit

Organizations 129
JOHN ZIETLOW
11 Capital Structure and Financial Health 145

MARCUS LAM, ELIZABETH SEARING, CHRISTOPHER PRENTICE,
AND NATHAN GRASSE
PART III
New Ways of Financing and an Approach to the
Business Practices 159
12 Business Practices in Nonprofit Funding 161

GABRIELA VACEKOVÁ, MÁRIA MURRAY SVIDROŇOVÁ,
MICHAL PLAČEK, AND JURAJ NEMEC
13 Crowdfunding as a New Model of Nonprofit Funding 173

DITA HOMMEROVÁ
Contributor Bios 188

Index 191
Acknowledgements
The editors would like to thank all the generous contributors to this
book. We are honored that so many of our colleagues agreed to col
laborate altruistically with this project despite their many professional
commitments. We would also like to thank the support provided by the
Routledge editorial team. A special mention to Brianna Ascher and Mary
Del Plato for guiding us in this novel experience and to David Varley
for giving us the opportunity to think about this book. Additionally, we
would like to acknowledge the support provided by our institution, the
University of Burgos, the academic support always provided by Prof.
Pablo de Andrés, and the financial support obtained from the Spanish
Ministry of Economy and Competitiveness (Project ECO2017-85356-P).
Finally, we are personally grateful to our respective families for their
patience and comprehension throughout all time we have spent ensuring
this draft becomes reality.
The editors apologize for any errors or omissions that may appear
anywhere in the text.
Ignacio Bretos, Millán Díaz-Foncea, and Carmen Marcuello thank
the Government of Aragon and the ERDF 2014-2020 project “Building
Europe from Aragon” for the support received, which has allowed this
chapter to be prepared.
Víctor Martín-Pérez, Natalia Martín-Cruz, Esther de Quevedo-Puente,
and Clara Pérez-Cornejo want to acknowledge the financial support of
the project ECO2016-78128-P, funded by MINECO.
John Zietlow gratefully acknowledges library research assistance for
his chapter provided by Donna Young and Austin Pelate at Southwest
Baptist University.
Marcus Lam, Elizabeth Searing, Christopher Prentice, and Nathan
Grasse would like to thank Sarah Macartney for line-editing and Phillip
Tran for exceptional research assistance.
Gabriela Vaceková, Mária Murray Svidroňová, Michal Plaček, and
Juraj Nemec thank received funding from the Czech Grant Agency
(GA19-06020S).
viii Acknowledgements
Dita Hommerová thanks funding from scientific project no.
TL02000055, “Effective marketing as a tool of the competitiveness
and sustainable development of non-profit organizations provid
ing social services” (Technology Agency of the Czech Republic, Eta
programme).
1 A Journey Through the
Finance of Nonprofit
Organizations
An Introduction
Inigo Garcia-Rodriguez and M. Elena
Romero-Merino
The finance of nonprofit organizations (hereinafter NPOs), defined as

the efficient generation and management of cash flow (Pajas & Vilain,
2004), has been a topic often relegated to second place by academics and
is usually confused with the act of fundraising. Most research regarding
NPOs financing is focused on private individual donations as they are
considered the most natural and characteristic source of funding for these
entities. The consideration of these private donations as essential for the
NPOs derives from theories regarding the origin of the so-called third or
social sector. For example, according to market failure/government fail
ure theories, the nonprofit sector arises when citizens decide to finance
those demands from public goods that are met neither by the state nor by
the market (Salamon & Anheier, 1998). As it requires the participation
of a large number of contributors to be able to finance the achievement
of NPOs’ objectives effectively, this method of financing is considered a
paradigmatic example of collaborative financing effort. In a sense, NPOs
financing can be seen as evidence that the ‘new’ crowdfunding strate
gies applied nowadays have been used in the nonprofit sector for several
decades without the intervention of specialized platforms through the
Internet. Therefore, whereas taxes were related to the public sector, and
the sale of goods and services to the lucrative private sector, NPOs were
always linked to private individual donations (Weisbrod, 1998).
Considering private contributions as the main source of NPO financ
ing may not be problematic in a growing economy, when it is easy to
cover the basic financial needs of organizations. However, it becomes a
drawback in times of economic recession, when NPOs are threatened by
a reduction of income whereas their work, and therefore their expenses,
do not decrease. Thus, in recent years, other sources of financing (both
external and internal) have gradually been considered more relevant.
In addition, beyond raising money to support NPOs’ activities, there
has been increasing focus on the way in which these financial resources
are managed (e.g., reserves policy and treasury and cash management).
Nowadays, although private donations have increased in absolute terms,
2 Garcia-Rodriguez and Romero-Merino
they represent a smaller part of the resources that organizations manage
in relative terms (Young, 2017), which indicates that NPOs are using a
mixture of different sources to finance their day-to-day operations.
The structure of this book follows a similar scheme to that described
above. Part I (Chapters 2 to 7) begins with a review of the literature
regarding reasons and drivers of donations, especially private individual
contributions as well as corporate sponsorship and public subsidies, and
the examination of the interrelationships among them. Part II (Chapters 8
to 11) describes how to manage these donations efficiently, the effects
of revenue diversification, and their influence on the financial health of
NPOs. Finally, Part III (Chapters 12 and 13) outlines the most innovative
sources of financing related to new technologies and how this method
of managing resources is bringing NPOs closer to the business practices.
Traditional literature on NPO financing is focused primarily on asking
why donors donate (i.e., determinants of donations) (Bekkers & Wiepking,
2011; Van Slyke & Brooks, 2005; Vesterlund, 2006), how to increase
their donations (i.e., research on fundraising) (Haibach & Kreuzer,
2004; Steinberg, 1986), or the price of these donations (i.e., NPOs’ effi
ciency) (Callen, 1994; Weisbrod & Dominguez, 1986). This research was
initially focused on charitable private giving, but it soon evolved to be
also relevant in explaining other common sources of NPO funding such
as private corporate contributions and public subsidies. In Part I of this
book, we consider all these topics by opening with the general question
of why donors donate and concluding with the interrelationships that
may exist between the private and public sources of financing.
Specifically, in Chapter 2, Bretos, Díaz-Foncea, and Marcuello outline
the main socio-economic motivations of individual private donors and
the importance of the organizational factors that influence the way in
which donors make their decision; however, the size, age, or legal form
of an NPO have been traditionally considered as drivers of private dona
tions (Marcuello & Salas, 2001). In Chapters 3 to 6, we have focused on
the analysis of NPO efficiency, governance, transparency, and reputation
as they all can be managed by the organization.
In Chapter 3, Martín-Pérez and Martín-Cruz describe the problem of
measuring efficiency in the nonprofit sector and, consequently, the price
of donations. As the authors point out, improving governance and pro
viding accessible accounting information would be the necessary con
dition to introduce competition in the market for donations, but the
sufficient condition requires a proper assessment of efficiency to calculate
at what price the NPO aims are achieved. For this reason, we considered
it necessary to include a review chapter on the evaluation of efficiency in
the nonprofit sector.
Regarding NPOs’ governance, transparency, and reputation, the litera
ture confirms that an effective design of the governance mechanisms and
an improvement in organizational transparency foster donors’ confidence
The Finance of Nonprofit Organizations 3
and organizations’ reputation and, therefore, lead to an increase in the
volume of financial contributions. Based on this, we address the three
interrelated topics throughout Chapters 4 to 6. In Chapter 4, Jegers
explains how NPOs’ governance includes all the mechanisms designed
to preserve stakeholders’ interests. According to the author, effective
governance can generate the perception that the organization is pursu
ing the ‘right’ objectives, and hence, incite donors to be more generous
in their contributions. In Chapter 5, Gálvez-Rodríguez, López-Godoy,
and Caba-Pérez describe how an increase in an NPO’s accountability
and transparency is welcomed by donors as they not only recognize
the professionalism of the organization, but they also understand that
the NPO complies with its responsibilities. Furthermore, in Chapter 6,
de Quevedo-Puente and Pérez-Cornejo emphasize the role of an NPO’s
reputation as it is directly related to the previously described tools (gov
ernance and transparency) and it seems obvious to assume that it will
help to attract money either from public or private contributors.
Part I of the book concludes by focusing on the consequences of the
interrelationships between the different sources of resources. On the
one hand, we address the influence of private corporate sponsorships
on reputation and other types of contributions (either charitable indi
vidual donations or public aids). Apart from individual private dona
tions, which may be periodic or one-time, there is another private source
of financial resources—those derived from both for-profit and nonprofit
organizations. Large corporations (corporate sponsorships) are a com
mon source of financial resources because they entail tax benefits for
contributors and substantial amounts of money for nonprofits. However,
there is also some reluctance by NPOs and society in general to accept
donations from these entities, especially when they are from companies
whose objectives are far (or even opposite) from those of the NPO to
which they are donating (e.g., it would be questionable that a company
that experiments on animals sponsors a project for an organization
whose objective is to avoid the degradation of the natural environment,
such as the WWF). In this way, as de Quevedo-Puente and Pérez-Cornejo
show in Chapter 6, NPOs have to deal with the potential risk of dam
aging their reputation (and reducing their supporters) due to negative
behaviors of their for-profit partners. On the other hand, in Chapter 7,
de Wit, Bekkers, and Wiepking address the interrelationship between
public and private sources of NPOs financing. Although neither private
individual donations nor public grants are required to be repaid, the first
usually have specific conditions attached; that is, they require compliance
with specific reporting requirements and are usually linked to a specific
project. These grants allow nonprofits to finance large and long-term
projects with a high social impact that could not be developed based
exclusively on small individual contributions. However, public fund
ing is radically rejected by some organizations that associate it with a
weakening of their independence (e.g., Greenpeace), whereas, in other
cases, it constitutes the main source of the NPO’s financial support (e.g.,
The Public Finance Initiative of UNICEF). This twofold perception of
public funding is described by de Wit et al., who argue that the impact
of public aid on private donations (crowding-out or crowding-in) can be
positive or negative depending on the NPO’s contextual factors.
If Part I of this book focuses on how to raise more money, Part II pays
special attention to the way in which this money is managed and how it
maintains the financial health of the NPO. Along this line, in Chapter 8,
Chikoto-Schultz and Sakolvittayanon explain how the use of several
sources of financing, the so-called revenue diversification, can assume
a key financial strategy for achieving financial stability and surviving
in times of economic recession. However, as the authors indicate, this
financing can also increase the risk and administrative costs of the NPO.
In terms of the way in which NPOs manage their financial resources,
we have included two chapters about slack resources and cash manage
ment. In Chapter 9, Calabrese and Ely describe how reserves can help
to maintain organizational spending during difficult economic times
although, at the same time, they are highly criticized by external stake
holders when they are considered excessive. In Chapter 10, Zietlow high
lights the importance of liquidity management, especially when NPOs
experience a cash flow crisis due to a shortfall of cash inflows relative to
cash outflows. The author reviews previous academic literature on the
topic and suggests some ways in which NPOs may measure and manage
liquidity to better achieve their missions.
Finally, we introduce the importance of capital structure in NPOs.
When these organizations design their funding structure to meet their
expenses, it is important to consider the cost and features of each source.
In addition to evaluating the possible effects that one type of donation
can have on others (as we have seen in Part I), the NPO needs to decide
between the use of internal or external funds. There is a clear differ
ence between having to repay the amount of money the organization has
borrowed (external resources) or, on the contrary, allocating such money
to net assets (internal resources). As Lam, Searing, Prentice, and Grasse
explain in Chapter 11, the cost of external financing is higher (repayment
of principal and interest), but internal financing should be considered
neither free nor unlimited. That is, NPOs incur costs (e.g., fundraising
events, staff dedicated to obtaining these resources, cost of goods sold
or services provided, etc.) to obtain internal funding and, in many cases,
such expenses increase proportionally more than the funding obtained
(their efficiency decrease), which could be seen by donors as an improper
use of their resources.
Part III is devoted to illustrating how the sector is seeking new sources
of funding and introducing new practices derived from the business
sector. In addition to using public and private donations as a method of
financing, NPOs can carry out commercial activities in service of their
social missions. They can therefore sell goods (in many cases products
made by the beneficiaries of the entity or related to any of its missions,
such as from fair trade) or they can charge fees for some of their ser
vices (e.g., membership fees, admission tickets for museums, orchestras,
or theaters). This source of income can be significant, but it is not use
ful for every nonprofit. The use of this option is considered by some as
an excessively risky approach to marketing, which would make NPOs
very similar to companies and, therefore, could cause them to lose other
sources of financing such as that derived from individual donations. The
recent phenomenon of adopting business practices in the nonprofit sector
is analyzed by Vaceková, Svidroňová, Plaček, and Nemec in Chapter 12.
Moreover, the evolution of technology is also adding new possibilities
that NPOs are taking advantage of. We have paid special attention to the
use of crowdfunding campaigns (see Hommerová in Chapter 13) as it is
one of the latest and most powerful methods to finance nonprofit projects
and also because it can be considered a modern adaptation of the original
NPO financing through the collaboration of a high volume of charitable
private donations.
As a whole, we can observe how there is some kind of interrelationship
between all the different topics we have dealt with throughout the book.
For example, in Chapter 6, de Quevedo-Puente and Pérez-Cornejo suggest
that accountability and governance mechanisms may improve reputation,
and this could have an effect on the donations received by the NPO. In the
same way, revenue diversification may have an impact on the margin and
reserves and on other financial measures (e.g., capital structure or financial
health) that also impact private donations or organizational efficiency (see
Calabrese and Ely in Chapter 9 and Lam et al. in Chapter 11). In addition,
governance mechanisms seem to have an effect on private donations (see
Jegers in Chapter 4), but Calabrese and Ely also suggest that they may
influence the accumulation of reserves. Finally, as Jegers points out, we
cannot ignore the problem of reverse causality, which could be applied in
most of the aforementioned relationships. Therefore, all these examples
demonstrate how we are dealing with complex relationships that need
clearer and more comprehensive theoretical support. In this way, beyond
testing direct relationships, scholars may consider more complex connec
tions through moderating and mediating effects.
We can also note the importance of technology in this sector. As long
as the use of these new technologies continues to increase in society,
NPOs should continue using them in several ways. First, information
technology (IT) allows NPOs to reach more people. The Internet allows
NPOs to share their activities with the entire society, not only with their
current donors, so organizations can take advantage of it and increase
the visibility of their activities. Second, IT enables NPOs to involve the
different stakeholders in the achievement of their organizational goals.
As stakeholders may be more informed, NPOs have to explore how
they could participate in a more active way (i.e., social networks may
allow NPOs to establish dialogue and obtain other opinions regarding
their activity). Similarly, if stakeholders observe how the NPOs listen
to them, their engagement will likely increase. Third, IT facilitates an
increase in the accountability of NPOs. As different authors have noted
(see Chapters 2, 6, 5, 4, and 13), the problems of information asym
metries between the organization and its stakeholders may be reduced by
using the Internet. It allows NPOs to be scrutinized by their stakehold
ers, and, if their analyses are positive, the organizational reputation may
increase (and hence, donations). Finally, IT continues to progress and
NPOs should take advantage of new financing tools. For example, some
NPOs are beginning to use blockchain and digital currencies, allowing
donors to follow the path of their contributions; potential informational
problems may therefore be substantially reduced.
Most chapters also note the lack of sources of information and of
empirical evidence. Apart from notable exceptions, scholars need to com
pile information from different sources, reducing the number of variables
or sample sizes. This problem is also evidenced in the study of short-term
relationships, rather than longitudinal periods that can provide more
conclusive findings. Moreover, most of the empirical research focuses on
the United States (which has the most complete sources of data) and large
NPOs; few studies analyze international samples. Obviously, the non
existence of homogeneous data complicates these international analyses,
which could help, as previously mentioned, to obtain more convincing
results. Therefore, we consider international research through the col
laboration of academics from different countries especially important.
In line with the above, the influence of the environment appears to be
an important line of research. We highlight the importance of consider
ing country-specific factors (institutional, economic social, and cultural
variable, as Garcia-Rodriguez and Jegers (2017) suggest), the different
subsectors within the nonprofit sphere, or the global macroeconomic
situation in future research on NPO financing. As de Wit et al. suggest
in Chapter 7, all these variables may help to explain the mixed evidence.
Moreover, the idiosyncratic characteristics of each NPO (e.g., size, age,
legal form) also seem to have an influence on the different relationships
that have been reviewed. Thus, each NPO should consider its own mis
sion, vision, and values; its financial situation; and the context in which
it works, and, based on this, explore the introduction of different fund
ing sources. Nonetheless, although NPOs try to manage their context,
there will always be some factors beyond their control that could impact
their reputation, credibility, and, ultimately, their funding. This is the
case with the inadequate behavior of other NPOs and the appearance
of financial scandals. Despite the fact that the NPOs affected by these
scandals could be considered ‘bad apples,’ they threaten the credibility
of the whole sector, decreasing the support from society and, therefore,
their funding (Greenlee, 2000; Greenlee, Fischer, Gordon, & Keating,
2007; Prakash & Gugerty, 2010; Slatten, Guidry, & Austin, 2011). These
reasons, among others, explain the promulgation of self-regulatory codes
that promote the efficient functioning of the entire nonprofit sector.
Finally, we are in line with recent literature (Andrés-Alonso, Garcia-
Rodriguez, & Romero-Merino, 2015; Mitchell & Calabrese, 2019) that
questions traditional financial assumptions in the nonprofit sector. As
noted above, the need to take the NPOs’ contextualization into account
prevents authors from drawing solid conclusions. Thus, a one-size-fits-all
model does not seem to be the approach to address the financial issues
of the nonprofit sector. There are not definite answers with which to
respond to questions such as what proportion of each revenue source is
the most advisable, or how much debt NPOs should have in their bal
ances. Therefore, NPOs should analyze their setting and, as Chapter 2
indicates, always keep their mission, vision, and values in mind as these
are the principles that should guide their activity and also their financial
decisions. In addition, it is highly important for NPOs to enhance their
relationships with their contributors by being accountable and trying to
involve them in the functioning of the organization. This strategy, which
could perfectly rely on the use of new technologies, could help NPOs
build long-term and stable relationships; that is, valuable alliances that
allow them to maintain the support of contributors and, therefore, to
continue with their activities in order to achieve their mission.
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Part I
Determinants of Public
and Private Income
2 Why Do Donors Donate?
Ignacio Bretos, Millán Díaz-Foncea,
and Carmen Marcuello
Introduction
The World Giving Index 2017 report published by the Charities Aid
Foundation (CAF) (2017) provides a unified index of financial donations,
volunteerism, and aid to foreigners worldwide.1 According to the report
Oceania (57%) is at the top of the list followed by America (35%), Asia
(34%), Africa (32%), and Europe (32%). At the same time in Europe,
the European Fundraising Association (2018, p. 7) states that European
countries with the highest share of individual donors are the United King
dom (64%), Netherlands (64%), Ireland (60%), Norway (55%), Sweden
(55%), and Germany (55%), and those with the lowest share are Spain
(33%), Italy (30%), and Slovenia (32%). However, notwithstanding the
relevance of the previous data, there are scarce official public statistics on
financial donations to nonprofit organizations (NPOs); the information
comes mainly from studies carried out by private entities and is charac
terized by a high dispersion and fragmentation of sources, methodolo
gies, and results.
Nevertheless, the academic literature has contributed significantly to
the analysis of the phenomena of donations to NPOs from the point of
view of different disciplines and, especially, from the economic perspec
tive. Some of the early works that address this issue include Buchanan
(1968), where donor behavior is considered as a purchase of public goods;
Feldstein (1975a, 1975b), which analyzes the effect of tax incentives on
donations; and Steinberg (1987), which provides a study on the relation
ship between public expenditure and donor behavior. Other influential
theoretical works were compiled by Andreoni (1989, 1990) introducing
the concepts of ‘pure altruism’ and ‘warm glow.’ We also have found
that academic circles traditionally discuss four models related to philan
thropy, nonprofit sector, and welfare state that tend to coexist in Europe
(MacDonald & Tayart de Borms, 2008: 1) the Anglo-Saxon model where
the NPOs have a greater role than the state in the provision of public
goods and represent a counterweight to the public authorities; 2) the
Latin/Mediterranean model where the NPOs have an important role in
12 Bretos, Díaz-Foncea, and Marcuello
providing education and social services and embed to a large extent reli
gious values; 3) the model prevailing in Central Europe where the state
contracts with NPOs ensuring a model of ‘social corporatism’; and 4)
the Scandinavian model which combines a strong universal welfare state
together with an outstanding advocacy of the NPOs.
In this chapter, we bring together different theories that explain moti
vations of donors to provide financial support to the NPOs. The chapter
also introduces some of the organizational variables that explain why
some entities obtain more resources than others. For this purpose, in the
following section we carry out a literature review of the most relevant
publications in terms of donor motivations; theories on donor behavior;
as well as the role of socio-economic factors, welfare state models, and
information technologies. In addition, we review the main academic con
tributions on corporate donors. The next section presents an analysis of
the characteristics of NPOs on which the receipt of donations depends.
Finally, in the last section we present the main conclusions of the chapter.
Which Motivations Do Donors Have? Which Theories

Explain Such Motivations?
According to a general approach to the concept of donation, the term
‘donation to an NPO’ can be considered as quite broad and encompass
both contributions of time and money. Nonetheless, the term ‘donation’
is usually associated directly with monetary contributions, while ‘dona
tion of time’ is related to the concept of volunteerism. In both cases, we
understand donation (money or time) as a contribution to an NPO with
out an explicit compensation. In other words, although direct donations
can be equally made to family and friends, strangers in the street, and
community, we only consider donations made to formally constituted
organizations that provide services to other individuals or indirectly to
the donor. Likewise, the relationship between the two types of donations
(time and money) is evident. It can be observed that financial donors
usually volunteer as well. However, the relation between contributions
of time and money has been hardly studied due to the lack of avail
able information (Callen, 1994). In this chapter we will focus on money
donations.
Another important issue that has to be clarified is the separation
between a purchase and consumption of goods and services ‘acquired’
through the act of donating. In case of monetary donations, we find that
a donor is making a purchase of a good or a service, to be consumed or
used by a third person (beyond one’s own family), that is, there is a sepa
ration between the fact of buying and the fact of consuming.
Regarding the motivations that induce donors to make monetary con
tributions to NPOs, we find that they are numerous, diverse, and clearly
affected by the socio-economic characteristics of donors. As claimed by
Why Do Donors Donate? 13
the academic literature, the most relevant and traditionally considered
motivations include altruism, religious motives, seeking after social rec
ognition, complying with the social norms of the donor’s environment,
level of public goods provision, and presence of fiscal incentives (Okten &
Weisbrod, 2000; Rose-Ackerman, 1996, 1997; Young, 1989). Hence, the
studies on donor behavior have mainly addressed so far the effects of
different factors on the utility function of donors. In this context, the pre
sent analysis discusses three main factors: effect of government spending
on the level of private donations; impact of tax incentives on monetary
donations; and effect of pure and impure altruism based on whether a
donation is included in a donor’s utility function or not.
In the first case, the definition of donation as a purchase of a public
good (Buchanan and Steinberg) implies that a donor has an ability to
observe an amount of the available public goods and make a contribu
tion based on that observation. It is important to remind that in this case
NPOs are mainly characterized as producers of public goods. In other
terms, the authors consider that NPOs are producers of collective goods
that provide benefits distributed among individuals in the society, such
as education, health, social services, culture, etc. Thus, according to the
initial assumption donors act as demanders of public goods, whenever
the final recipient of these goods is a third person or the donor himself,
directly or indirectly. This means that, when modelling the behavior of
private donors, it is represented by a demand function rather than sup
ply. That is, it is described by a utility function allowing to derive the
demand function for public goods of an average donor. A donation of
one person will also be affected by donations of other people, provision
of public goods made by a government, and by a set of NPOs. Therefore,
the total utility of a donor depends on consumption of private goods and
on total amount of public goods. The latter is determined by private con
tributions of the donor, total contributions made by other donors, and
contributions of the public sector (either as a direct provision or through
subsidies to NPOs) (De Wit & Bekkers, 2016; De Wit, Bekkers, & Broese
van Groenou, 2017).
In the second case, which is the effect of altruism, Andreoni’s initial
works (1989, 1990) introduce the idea of differentiating pure altruism
from impure altruism. Pure altruism (previous authors are Becker, 1974;
Roberts, 1984) refers to a donor making a donation without waiting
for or receiving a tangible or intangible compensation. Impure altruism
refers to a donor expecting to receive some kind of personal, tangible, or
intangible benefit. In case of impure altruism, donors make their deci
sions on the basis of prestige, respect, personal utility, and possible future
or indirect consumption that the donor receives as a reward. Kingma and
McClelland (1995) add that: 1) the donor receives satisfaction (utility)
from the fact that other people improve their well-being (donations to
the development cooperation NGOs, children, disabled people, cancer
patients); 2) the donor perceives that through his donation he receives the
capacity or power to influence the decisions of the NPO; or 3) the donor
anticipates that he may be a future beneficiary of the NPO to whom he
makes the donation and therefore acts with an interest.
In the third case, demand functions include fiscal effects as a price of
donation (Feldstein, 1975a, 1975b; Harbaugh, Mayr, & Burghart, 2007).
In this situation, tax incentives represent an opportunity cost (price) that
a donor perceives. Such cost is calculated in relation to each person’s tax
situation. This gives grounds for the existence of different models of tax
incentives in several countries that aim to encourage private donations
from both individuals and companies. In this case, the mentioned works
analyze the decision-making process of an individual donor by differenti
ating two moments: the decision to donate or not, and the decision with
respect to how much to donate. This distinction is important because the
factors that influence the decision to give do not necessarily have to be
the same as those which determine the amount of the donation (Sargeant,
1999).
On the other hand, as we mentioned at the beginning of this section,
the socio-economic factors are fundamental in explaining the donor
behavior. It is also noted that individual socio-economic factors and
household characteristics are included in the analysis. In addition, some
studies analyze a joint decision of household members, not just individu
als, to donate (Burgoyne, Young, & Walker, 2005; Garcia & Marcuello,
2001). Bekkers and Wiepking (2011) and Wiepking and Bekkers (2012)
conducted a comprehensive study of the impact of age, sex, education,
family composition, income, socialization, and religion on donor deci
sions. The authors examine in detail the main socio-economic factors
analyzed in the academic literature, highlighting (Bekkers & Wiepking,
2011, p. 339) a positive effect of
affiliation with a religion (especially Judaism and Protestantism);

stronger religious involvement; a higher age; a higher level of edu
cation; income and wealth; home ownership; a better subjective
financial position; being married; having children; having a paid job;
higher cognitive ability; having prosocial personality characteristics
such as empathy; growing up with parents with higher education,
income, religiosity and volunteering activity. The evidence on town
size, gender, family status, race, and political preferences is mixed.
The authors suggest that more research is needed to understand the

relationships between these factors. The authors also stress “we have
a lot of descriptive knowledge about who gives what but we have
very little knowledge about why some people give more than others”
(Bekkers & Wiepking, 2011, p. 356). In addition to incorporating the pre
vious socio-economic factors, the most recent works focus on developing
a theoretical relationship between behavioral intention and behavior of
donors in the context of such concepts as satisfaction, trust, commitment
to explain donation, and difference between giving intention and giving
behavior (Shang, Sargeant, & Carpenter, 2019).
Another issue that has been analyzed by different studies is the impact
of the welfare state model of each country on the level of donations. This
question is related to the crowding-out effect proposed by Steinberg but
goes further due to: 1) the role of the nonprofit sector and of the funding
it receives from the public sector; 2) different policies with respect to both
the provision of public goods and fiscal incentives; and 3) the cultural
environment related to philanthropy (Kerlin, 2013; Pennerstorfer &
Neumayr, 2017; Salamon & Sokolowski, 2004). Thus, for example, the
Anglo-Saxon countries are considered to have the longest philanthropic
tradition, followed by the corporatist welfare states while social democ
racies and Mediterranean countries tend to have a lower philanthropic
performance. However, Pennerstorfer and Neumayr (2017, p. 550) pro
pose that “the principal conclusion that can be drawn from this study is
that the welfare state structures private giving.” In this sense, they add an
important question:
This is a hint that differences in giving behavior across nations are

even more complex to explain than the crowding-out theory would
suggest. Keeping that in mind, claims for the retrenchment of the
welfare state and for more reliance on private funding and private
provision of welfare services might not work in all countries the
same way, but rather lead to quite different effects, depending on
philanthropic traditions and values, but also on existing institutional
arrangements. Moreover, referring to the found crosswise crowding-
in, a call for increased private funding of welfare services could result
in reduced resources and thus less activities in non-core welfare fields.
(p. 555)
Previous studies on motivations, behavior, and decision models are still

relevant. However, information technologies have introduced profound
changes in donor behavior, both in terms of access to information and
ease with which donations can be made (Ben-Ner, 2018). Likewise, these
changes have facilitated a creation of new channels for donating, such
as crowdfunding, Facebook, and all kinds of digital platforms (Salido-
Andrés, Rey-García, Álvarez-González, & Vázquez-Casielles, 2019).
According to the 2018 Global Trends in Giving Report (Nonprofit Tech
for Good, 2019, p. 23),
29% of donors worldwide say that social media is the tool that most
inspires them to give, however, email is a close second at 27%. In
third place is an organization’s website at 18%. Together, digital
communications inspire 74% of donors to give. Organizations must
invest in technology to stay relevant.
The impact of information technologies on donations to NPOs needs to

be further explored as a field of study.
Finally, we would like to point out briefly another related topic which
also has to be developed: corporate donations—corporate philanthropy.
As stated by Noble, Cantrell, Kyriazis, and Algie (2008, p. 315),
although corporate support for many nonprofit organisations (NPOs)

represents only a relatively small component of their overall income
its importance is growing. As a consequence, the need to understand
corporate giving behavior in a way that supports the development
of strategically targeted and successful marketing campaigns is of
growing importance to marketing managers in many NPOs around
the globe.
On the other hand, Amato and Amato (2007, p. 229) point out, “Corpo
rate giving as a percentage of profit declined over the past 15 years despite
recent research suggesting that firms have financial and strategic motives
for socially responsible behavior.” In a similar way, again, it is neces
sary to clarify what understanding lies behind a corporate donation. We
define corporate donations as voluntary donations of corporate resources
to an NPO. This donation can be made through direct contributions or
through corporate foundations. Another important issue to address is the
motivation of corporate donations. Gautier and Pache (2015, p. 347)2
identify three motivations giving rise to three general models: 1) corpo
rate philanthropy as a voluntary expression of the firm’s commitment to
the common good; 2) long-term, community-oriented investment through
which firms ensure their competitiveness while fostering their business
environment; 3) marketing approach to corporate philanthropy, where
giving is used as a commercial tool. Regarding the drivers of corporate
giving, the authors describe different levels of decision-making and there
fore different types of factors that affect each of them. Motivations of
individual managers, company as a whole (ownership structure, board
membership), and of the sector in which a company operates (industry
structure) must be taken into account. In this sense, Amato and Amato
(2007) observe that “small firms give because they are frequently locally
owned and thus close to the consuming public, while large firms give
because of the greater visibility that comes from size.” The researchers
also affirm with respect to the effect of industry on company’s donations,
that “the industry giving culture may create an environment that requires
firms to meet or exceed competitor philanthropy in order to maintain
customer and community goodwill” (Amato & Amato, 2007, p. 238).
Finally, we would like to highlight the work of Catalão-Lopes, Pina, and
Branca (2016) where they examine a corporate giving decision under
changing macroeconomic conditions. This study shows that there is a
dynamic relationship between economic cycle, revenues, and corporate
giving. This relationship takes place in such a way that “in the short run
the slack resources theory dominates, but the good management theory
plays a role in the long run” (Catalão-Lopes et al., 2016, p. 2305).
Which Organizational Features Determine That Some

NPOs Receive More Donations Than Others?
This question is of great importance since some studies and NPO man
agers traced a link between more donations received and greater effi
ciency. In this manner, the traditional market postulates and functioning
mechanisms of a capitalist company are used to evaluate the efficiency
of the NPOs according to the income received or taking into account
only certain economic and financial indicators that do not necessarily
reflect the activity of the NPO. In case of NPOs, access to funding is a
strategic issue for their survival as their services are often not designed to
bring income (development cooperation, services to marginalized groups
or those at risk of social exclusion, health, education, social services,
culture, etc.). In addition, funding must be consistent with the mission
and values of an organization. As a result, we find NPOs with different
funding models and strategies, ranging from those that mainly provide
public goods and have a greater access to the public funding to those
that defend human rights and environment, whose funding strategies
are based on independence from governments and other large donors in
order to maintain their freedom in taking decisions and avoid an inter
ference on the part of certain contributors. On the other hand, the size
of NPOs is a key factor in the ability to access the donor ‘market.’ That
is, some organizations such as, for example, associations of relatives of
people who are deaf-blind will always be small entities with no capacity
to ‘compete’ for private funding like other large organizations such as
Red Cross, Caritas, etc. To sum up, private donations received by NPOs
will be conditioned by numerous factors beyond the classic ones used by
the market.
The 2008 crisis additionally led to a decrease in services provided by
public administrations and at the same time to an increase in needs of
many social groups. This situation resulted in the increased number of
NPOs providing services no longer offered by government and also devel
oping new services for the emerging necessities of different social groups
(housing, employment, help to refugees, etc.). An important decrease in
governmental funding of the NPOs caused an increased competition for
private funding.3 On the other hand, donors received a greater access to
information while NPOs also got direct access to donors by means of
information technologies. According to Similon (2015) this phenomenon
added to the emergence of special labels and umbrella organizations
aimed at creating self-regulatory models and facilitating transparency,
accountability, and coordination of fundraising activities.4 The objective
of these regulatory mechanisms is to ensure certain requirements neces
sary for NPOs to be met so that donors have confidence in their donations
being used efficiently. This efficiency has several elements: investment of
funds into the activities described above, results obtained by an NPO,
and reasonable amount of costs.
The first two issues are crucial for the NPO’s relationship with donors
while the third element arises because of the competition for funds. The
need to look for private funding has increased the expenditures neces
sary to achieve it: advertising, staffing, and fundraising activities, differ
ent from the NPO’s main activities. Thus, the expenditure in fundraising
activities is one of the variables for analyzing the fundraising efficiency
of organizations in order to ensure that these expenses are not excessive
(Bowman, 2006; Marcuello & Salas, 2001; Posnett & Sandler, 1989;
Weisbrod & Dominguez, 1986).
Finally, as we mentioned at the beginning of the chapter, while the
phenomenon of private donations is important, there are hardly any offi
cial public statistics in this field, and it is required to turn to very diverse
and fragmented sources. The information available on which sectors of
activity and NPOs receive most of donations is very limited. Among dif
ferent reports, Giving United States of America (U.S.A) (2018), Giving in
Europe (European Research Network on Philanthropy, 2017), and CAF
United Kingdom (U.K.) Giving Survey (2019) stand out. Such reports
coincide in data which points to the religious groups as the largest recipi
ents of the donations (31% U.S., 19% U.K., 40% Netherlands, 14%
France, 21% Switzerland, 27% Norway, 13% Austria), while the rest
of the sectors vary according to each country and mainly include public-
society benefit, health, education, international aid, and others.
Conclusions
Private donations to NPOs are an international phenomenon. How
ever, the available information and homogeneous statistics that enable
a global vision and its evolution are very scarce and fragmented. The
academic literature has analyzed this topic from the point of view of
different disciplines such as economics, sociology, psychology, and law
and includes an important number of studies. Main contributors attempt
to characterize the individual donor using different socio-economic vari
ables, like their motivations and behavior, taking into account level of
altruism, effect of tax deductions, level of provision of public goods, wel
fare state model, and impact of information technologies on the emerging
models of private contributions to NPOs. On the other hand, corporate
donors contribute financially to NPOs as well, even though to a smaller
extent than individual donors. In case of corporations, the motivation to
donate varies from commercial motives to increase the company’s profit
to striving to contribute to the common good.
The NPOs as recipients of donations are facing a constantly growing
pressure to find sources of funding for their activities. This is caused by
the increased needs of social groups, as well as by the decrease in govern
mental funding and rise in the number of NPOs. The latter develop dif
ferent financing strategies as another element of the organization’s global
strategy at the service of the social objectives of the entity. This is a highly
relevant topic because the assessment of NPOs based on economic and
financial indicators only, will not adequately reflect efficiency in achiev
ing their objectives. In the recent years, self-regulating systems have been
created within the sector, as well as umbrella organizations and watchdog
organizations that attempt to facilitate the process of choice for donors
when it comes to deciding on whom to donate. In this sense, it should
be mentioned that government continues to be one of the main agents to
supervise and control the NPOs’ activities through funding policies. Such
policies establish, in turn, very exhaustive controlling mechanisms that
guarantee the achievement of the objectives and the proper use of the
NPO’s funding. This capacity of the public sector can be hardly acquired
by the market or private entities.
Finally, it should be noted that government policies regarding the
financing of NPOs are essential to ensure the existence of NPOs as well
as their plurality and heterogeneity. The donor market will be subject to
the preferences of people who do not have access to complete informa
tion for decision-making. This creates a problem of asymmetric informa
tion that results in larger NPOs obtaining more funding at the expense
of smaller NPOs. As a consequence, small NPOs are unable to allocate
resources to the fundraising because their budgets are primarily spent on
the organization’s objectives. The situation becomes even more difficult
because of the fact that the goods and services offered by most NPOs
are public goods and are sometimes offered to the user free of charge
or at a price below the cost of production so funding will always be a
critical issue. Furthermore, the redistributive capacity of the public sector
which provides public funding to promote NPOs in all sectors and reach
a greater share of population can hardly be transferred to the donor mar
ket. In this sense, the study of Weisbrod (1986) reinforces the idea that
the joint production of public services by government and NPOs enables
higher levels of public goods provision.
Notes
1. Another private statistic is the 2018 Global Trends in Giving Report
(Nonprofit Tech for Good, 2019).
2. See also Committee Encouraging Corporate Philanthropy. (Ed.). (2012).
Giving in numbers 2012 edition. New York, NY.
3. See also Maier, Meyer, and Steinbereithner (2016), and Chapter 12 of this
book about NPOs becoming business-like.
4. According to Coffman (2017), another type of organization that has emerged
is the watchdog rankings that has received numerous criticisms.
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3 Efficiency in Nonprofit
Organizations
Víctor Martín-Pérez and Natalia
Martín-Cruz
Introduction
In a world of scarce resources, the nonprofit sector must not only be
effective (achieving its intended objectives) but also efficient; in other
words, it must control the level of resources it uses to accomplish a cer
tain goal (Banerjee, 2009; Duflo & Kremer, 2003). Being more efficient
means being able to carry out more actions with the same amount of
resources, not only enabling the effect of the resources to be multiplied,
but also reducing the pressure on donor agencies and institutions.
The measure of efficiency is widely accepted as the relationship between
the level of objectives achieved and the volume of resources used (Martín,
Hernangómez, & Martín, 2007). However, this measure poses one initial
problem which is, given a certain relationship between objectives and
resources, to know whether it is efficient; in other words, to establish an
adequate standard. A second problem concerns the multiple dimensions
that the objective may involve (outputs) and the different resources used
to obtain them (inputs), thus making it necessary to assess all the dimen
sions simultaneously and to assign weights to the organizational factors
(Hernangómez, Martín, & Martín, 2009).
In the case of NPOs, in order to gauge their efficiency, the initial
objective needs to be determined; that is, exactly what you are trying to
achieve. One response would be to improve the quality of life and to gen
erate well-being in people, especially with regard to meeting the require
ments of those who are most in need, by offering services that provide a
social benefit and, in many cases, by acting as substitutes or supplements
to the public sector and the market.
Evaluating the efficiency of NPOs is therefore a complex task, given
that it is a more difficult objective to measure in comparison to com
panies, as it involves multiple dimensions (quality, adaptation to the
needs met, viability, relevance, sustainability, impact, among others), and
because the production function is difficult to determine. In addition,
NPOs themselves tend to question whether it is really worth devoting
24 Martín-Pérez and Martín-Cruz
funds to evaluation, to the detriment of other actions aimed at achieving
their mission.
Even large donors adopt a somewhat undecided attitude towards
whether assessing the efficiency of the organizations they fund can actu
ally help to improve the future granting of donations. In many cases,
they prefer to focus on a prior analysis of the actions to be financed and
pay only secondary attention to whether the results that motivated the
initial donation have actually been achieved (Porter & Kramer, 1999).
Even so, it seems clear that if there were accurate efficiency indicators for
NPOs then donors would value more those organizations which display
a greater capacity to generate well-being or welfare to a greater number
of people: that is, they would choose the organization which proves most
efficient in achieving its objectives.
The Problem of Measuring Efficiency in NPOs

As with any organization whose objectives are difficult to quantify and
who only tend to look at how resources are used, without taking into
account compliance or non-compliance with objectives, little is known
about the efficiency with which NPOs go about their activities. This may
give the impression that efficiency is not seen as an issue which merits
attention in the nonprofit sector. This lack of knowledge substantially
reduces the possibilities of NPOs being able to learn from their own
experiences, and indeed those of others, in order to improve in the future.
In addition, it may give rise to a certain lack of concern for the long-term
results of the actions undertaken, fostering a climate of permissiveness
towards manifestly improvable yields and preventing an objective analy
sis that can reveal which mistakes are being made and how they may
be corrected in the future. All of this may lead to an inability to realis
tically evaluate what contribution the third sector makes to the objec
tives initially established, using the resources available. NPOs should
not compete like companies. Rather, their ‘business’ is to create social
value (Porter & Kramer, 1999). However, because they use altruistically
granted resources, they have a greater responsibility towards them and
must ensure their best possible use, which will mean savings for donors
or being able to engage in a greater number of actions.
Measuring efficiency is a complicated task because of the complexity
of establishing precise measures and due to entities’ own doubts about
whether it is really worth devoting funds to evaluation, to the detriment
of possible additional strategies. In practice, efficiency evaluation is usu
ally only partial and is conducted in a biased manner, often merely involv
ing ascertaining whether funds were used as proposed, and employing
indicators which show what proportion project expenditures represent
over total income or what percentage administrative expenses represent
over total expenses. Yet such an evaluation usually fails to measure the
Efficiency in Nonprofit Organizations 25
social impact of the actions financed, actions which often transcend the
short term. In addition, evaluations are usually carried out by the very
organizations who receive the funds, such that they cannot be expected
to be either objective or reliable, because they will seek to present results
which allow them to maintain donor support.
Although efficiency evaluation may prove costly and complex, it is a
task that cannot be ignored, given that in a world of scarce resources it
is both necessary and desirable to make the best possible use of them, a
reality which the third sector is not currently in a position to ensure. Any
control over efficiency obtained by NPOs would introduce competition
among them, because donors would have a point of reference with which
to establish comparisons when deciding which entity to contribute to.
This would result in greater pressure to achieve constant improvement
and would prove extremely positive due to the greater impact it would
have for society. For donors, it would place fewer demands on them and
would instill greater confidence vis-à-vis the correct use thereof—which
could also curb any doubts they might have and help to boost contribu
tions. For beneficiaries, it would enable a greater number of actions to
be carried out to improve their living conditions. If such a change of
direction is not undertaken, NPOs will continue to act in a context where
they cannot fail, which will damage entities that are more efficient and
more concerned with improvement, given the difficulty of being able to
distinguish amongst them.
Accounting Measures of Efficiency in Nonprofit Organizations

The third sector cannot use the measures of partial efficiency that firms
use, such as profitability or indicators which reflect the ability to com
pensate shareholders, given that they do not make much sense in view of
these organizations’ particular characteristics. It is necessary to establish
a homogeneous and comparable indicator which provides donors with
useful information to evaluate NPOs’ operations (Trussel & Parsons,
2007): in other words, once the donor has decided to contribute to a cer
tain cause, an indicator that will help them to determine which organiza
tion will make the best use of its resources and, therefore, which of them
they will donate to.
Global efficiency has become the most widely used indicator to meas
ure overall performance within the third sector, although the issue
remains far from clear (Herman & Renz, 1999; Jackson & Holland,
1998; Kanter & Summers, 1987; Murray & Tassie, 1994) and is one on
which academics and professionals fail to agree.
It is this lack of agreement which has meant that researchers face
serious difficulties when developing normative conclusions related to
which nonprofit activities and attributes yield higher (or lower) levels
of efficiency. For professionals, the difficulties stem from the inability to
assess efficiency effectively, particularly when seeking to pinpoint tried
and trusted measures that allow for comparisons between organizations
(Ritchie & Kolodinsky, 2003). Therefore, more research into the effi
ciency of NPOs is necessary (Forbes, 1998; Herman & Renz, 1999; Hoe-
fer, 2000; Rojas, 2000; Stone, Bigelow, & Crittenden, 1999; Tuckman &
Chang, 1998).
In the context of the third sector, efficiency is defined by Parsons
(2003) as the degree to which an NPO dedicates the available resources
to its mission: that is, it shows the average percentage of each donation
that actually reaches the organization’s beneficiaries. The measures used
in the literature to gauge efficiency have been based on the analysis of
ratios, prominent amongst which are the following:
• Price is defined as the cost, for a donor, of purchasing a dollar of

output for an organization’s beneficiaries. Without accounting for
tax deduction, price is measured as the inverse of the percentage of
expenditure on projects (Callen, 1994; Posnett & Sandler, 1989;
Tinkelman, 1998; Weisbrod & Dominguez, 1986).
• Program ratio, represented as the percentage of project expenditures
to total expenditures, is used to measure efficiency instead of price
(Baber, Roberts, & Visvanathan, 2001; Kitching, Roberts, & Smith,
2012). Baber et al. (2001) argue that this measure may indicate the
NPO’s fundraising strategy.
• Allocative efficiency, a very similar and also widely used measure
(Andrés, Azofra, & Romero, 2010; Andrés, Martín, & Romero,
2006; Callen & Falk, 1993; Hernangómez et al., 2009), calculates
the percentage of project expenditures to the organization’s total
revenue.
• Technical efficiency or administrative expense ratio (Andrés et al.,
2006, 2010; Callen & Falk, 1993; Greenlee & Brown, 1999;
Hernangómez et al., 2009) is defined as the percentage of adminis
trative expenses over total expenditures. Some authors (Greenlee &
Brown, 1999) use a similar measure which involves excluding fund
raising costs from total costs.
When observed carefully, these forms of measuring efficiency are

closely related, provided that the total income and expenses of the year
are equal, given that price is the inverse of the ratio of projects, with
technical efficiency being complementary to project ratio. Due to their
simplicity, ability to obtain information, and possibilities for homoge
nous comparisons between entities, the latter two indicators (technical
and allocative efficiency) are widely used by donors (Hyndman, 1991;
Khumawala & Gordon, 1997) when deciding which organizations to
donate to and, should the amount be high enough for them to be able
to exert an influence, also establish limits as to what the funds should be
used for. The entities themselves also employ the two indicators men
tioned to convey to society as a whole an image of transparency and of
fulfilling their mission, which might ultimately translate into raising a
greater amount of funds.
Based on these indicators, the donor’s main concern is the percentage
of expenditures dedicated to projects, as this will determine what part
of the donation is actually applied to beneficiaries. In fact, when provid
ing financing for a specific project, most institutional donors establish in
advance the maximum percentage that can be represented by expenses
not directly attributable to the project: that is, they establish the ratio
of administrative expenses the entity must adhere to in order to obtain
funds and thus ensure efficient use of resources.
However, these indicators provide a partial and biased evaluation of
efficiency because they are confined to checking whether funds were used
as intended and what proportion the project expenses and administra
tive expenses represent. However, they fail to measure the impact of the
actions financed or the results achieved, such that they cannot really be
conceptualized as efficiency measures because they are not comparing
objectives accomplished with resources used.
Non-Accounting Measures of Efficiency in Nonprofit

Organizations
Data Envelopment Analysis (DEA) is a particularly suitable method for
the public and nonprofit sector, given that it adapts to the unique char
acteristics displayed by the organizations operating in them—difficulty in
knowing the prices1 of the product/service they generate, a hard to define
production function, or working with multiple inputs and outputs—and
because it helps to establish an objective measure of efficiency in groups
of organizations that have no aggregate indicators to accommodate the
multiple simultaneous objectives they pursue.
DEA is a non-parametric mathematical programming method, origi
nally proposed by Charnes, Cooper, and Rhodes (1978), to measure
the relative efficiency of homogeneous units (DMU decision-making
units) by constructing an efficient frontier. The method identifies the
efficient units2 and builds a boundary formed by the linear combina
tions between these units. The efficiency of the rest of the units is meas
ured according to their distance from the efficient frontier which is
calculated.
The formalization of the analysis is carried out as a mathematical
optimization model, the estimated variables of which are the efficiency
indices, defined as the quotient between the weighted sums of the out
puts and the weighted sums of the inputs. It is a non-parametric tech
nique because it does not specify a concrete functional form between the
maximum of achievable outputs and the required inputs. Applying this
technique allows the measure of efficiency for each entity to be obtained,
values for which can vary between 0 and 1 (where 1 corresponds to
the location on the efficient frontier), and determines the weights in an
endogenous way corresponding to the values of the greatest possible effi
ciency. This methodology thus provides a global measure, determined in
an objective and numerical way, of the value of efficiency that does not
require a standard reference value to be established in advance (Charnes,
Cooper, Lewin, & Seiford, 1994; Farrell, 1957; Farrell & Fieldhouse,
1962), given that the frontier is obtained from the set of organizations
considered, thus overcoming the problem of comparisons made using
accounting measures.
DEA can be employed applying input orientation or output orienta
tion. The choice of analysis orientation (input or output) depends on the
nature of the problem and is related to entities’ control over the variables:
if the units considered are restricted in terms of input management, they
opt for an output orientation, and vice versa. In output orientation, a
unit is efficient if no other unit can produce a higher level of outputs with
the same level of inputs. In input orientation, a unit is efficient if there is
no other unit which, when decreasing the amount of inputs (maintaining
the proportion), obtains the same quantity of outputs. In both cases, it is
necessary to establish what products result from the organization’s activ
ity, as well as the main factors used to achieve them.
There are different versions of DEA depending on the assumptions
concerning the production technology and the restrictions incorporated.
The mathematical formulation of the basic model, assuming constant
returns to scale, for the output and input orientation, is presented in
Table 3.1, where ϕ0 and φ0 represent the efficiency indicators for each
orientation, yrj and xij represent the quantities of output r and input i of
DMU j, ur0 and vi0 represent the weights of output r and input i. Finally,
Table 3.1 CCR Model
Output Orientation Input Orientation
m t
Min c0 = L vik xik Max r0 = L urk yrk
i =1 r =1
t m
s.t.f urk yrk = 1 s.t.L vik xik = 1
r =1 i =1
t m t m
-L urk yrj + L vik xij � 0 ( j = 1,...., n ) Lu rk rj y - L vik xij : 0 ( j = 1,...., n )
r =1 i =1 r =1 i =1
urk � 5 ( r = 1,..., t ) urk � 5 ( r = 1,..., t )

vik ; 5 ( i = 1,...., m ) vik � 5 ( i = 1,...., m )
Source: Basso and Funari (2004)
ε represents a small enough positive value below which the weights can
not fall (Basso & Funari, 2004).
Within this methodology, we can apply two approaches to determine
an organization’s degree of efficiency: technical efficiency, which reflects
an organization’s ability to obtain the maximum level of production with
given resources, and allocative3 efficiency, which corresponds to the abil
ity to use the resources according to the optimal proportions in view of
their prices. In turn, each of them can be determined by applying them to
the inputs used, or to the outputs generated.
Although it is possible to include multiple outputs and inputs in the anal
ysis, as the number of variables included in the calculation increases, DEA’s
ability to discriminate4 decreases. It is also necessary to remember the non
existence of tests to determine the statistical significance of the variables
included and to evaluate the goodness of fit. In light of these considera
tions, as a general recommendation, the sum of inputs and outputs should
not exceed one third of the sample size (Banker, Charnes, & Cooper, 1984;
Banker, Charnes, Cooper, Swarts, & Thomas, 1989; McMillan & Datta,
1998). Moreover, when evaluating efficiency in relative terms, and because
this technique is sensitive to extreme values, the units included in the anal
ysis must be homogeneous: that is, the same production technology must
be applied and must operate under an identical institutional framework.
Applying DEA in the Nonprofit Sector

Applying DEA to calculate efficiency is nothing new in the third sector.
This technique has proven particularly suitable, given both its adaptation
to the sector’s unique characteristics—difficulty in knowing the prices
of the product/service generated, the production function to which they
adjust or working with multiple inputs and outputs, and because it estab
lishes an objective measure of efficiency in groups of organizations that
lack any aggregate indicators which accommodate the multiple simulta
neous objectives such organizations pursue. Within the nonprofit sector,
numerous studies have applied this method, key amongst which are the
health sector and education, although it is only now beginning to be used
in the development cooperation sector.
Given the difficulty in directly measuring some of the services provided
by the nonprofit sector, due to the number of parameters involved in
such services and the different objectives pursued, intermediate indica
tors have been used to evaluate these outputs. In the health sector, meas
ures include:
• Number of patient days (Al-Shammari, 1999; Hu & Huang, 2004;

Valdmanis, 1990, 1992).
• Number of inpatients (Banker, Conrad, & Strauss, 1986; Grosskopf &
Valdmanis, 1987; Gruca & Nath, 2001; Lo, Shih, & Chen, 1996;
Valdmanis, 1992; Watcharasriroj & Tang, 2004).
• Number of patients (Hu & Huang, 2004; Rosenman, Siddharthan, &
Ahern, 1997).
• Number of discharges (Byrnes & Valdmanis, 1994; Watcharasri
roj & Tang, 2004; White & Ozcan, 1996).
• Number of surgical operations (Al-Shammari, 1999; Grosskopf &
Valdmanis, 1987; Hu & Huang, 2004; Lo et al., 1996; Valdmanis,
1990, 1992).
• Number of outpatient visits (Grosskopf & Valdmanis, 1987;
Gruca & Nath, 2001; Hu & Huang, 2004; Lo et al., 1996; Valdma
nis, 1990, 1992; White & Ozcan, 1996).
• Number of emergency room visits (Grosskopf & Valdmanis, 1987;
Hu & Huang, 2004; Valdmanis, 1990, 1992).
As regards the education sector, the most widely used measures to

characterize outputs have been:
• Number of students (Carrington, Coelli, & Rao, 2005; Coelli, 1996;

Hernangómez, Borge, Urueña, Martín, & Benito, 2007; Urueña &
Martín, 2012).
• Number of undergraduate students (Ahn, Charnes, & Cooper, 1988;
Avkiran, 2001; Beasley, 1995; Madden, Savage, & Kemp, 1997;
McMillan & Datta, 1998; Post & Spronk, 1999; Rhodes & South-
wick, 1993).
• Number or percentage of graduate students (Ahn et al., 1988; Atha
nassopoulos & Shale, 1997; Avkiran, 2001; Beasley, 1995; Car
rington et al., 2005; Hanke & Leopoldseder, 1998; Madden et al.,
1997; McMillan & Datta, 1998; Post & Spronk, 1999; Rhodes &
Southwick, 1993; Stern, Mehrez, & Barboy, 1994).
• Achievement scores on test grade levels (Kirjavainen & Loikkanen,
1998; Lovell, Walters, & Wood, 1994).
• Student retention rates (Avkiran, 2001; Breu & Raab, 1994).
• Published papers in international refereed journals (Carrington et al.,
2005; Hanke & Leopoldseder, 1998; Hernangómez et al., 2007; Joh
nes & Johnes, 1993, 1995; Korhone, Tainio, & Wallenius, 2001;
Madden et al., 1997; Stern et al., 1994; Urueña & Martín, 2012).
• Research funds (Avkiran, 2001; Beasley, 1995; Carrington et al.,
2005; McMillan & Datta, 1998; Post & Spronk, 1999; Rhodes &
Southwick, 1993; Stern et al., 1994).
• Number of research projects (Ahn et al., 1988; Hanke & Leopold
seder, 1998).
As regards the inputs used, the different empirical works reviewed have
shown a wide variety of variables used as representative elements of the
factors which organizations, in both health and education, need in order
to carry out their activities and to generate their services. Some examples
from the health sector include:
• Number of physicians (Al-Shammari, 1999; Grosskopf & Valdma

nis, 1987; Hu & Huang, 2004; Kooreman, 1994; Lo et al., 1996;
Valdmanis, 1990, 1992; Watcharasriroj & Tang, 2004).
• Number of nurses (Byrnes & Valdmanis, 1994; Gruca & Nath, 2001;
Hu & Huang, 2004; Kooreman, 1994; Lo et al., 1996; Valdmanis,
1992; Watcharasriroj & Tang, 2004).
• Number of beds (Al-Shammari, 1999; Byrnes & Valdmanis, 1994;
Gruca & Nath, 2001; Hu & Huang, 2004; Lo et al., 1996; Valdma
nis, 1992; Watcharasriroj & Tang, 2004; White & Ozcan, 1996).
• Paramedical personnel (Al-Shammari, 1999; Grosskopf & Valdma
nis, 1987; Valdmanis, 1990, 1992; White & Ozcan, 1996).
• Non-medical personnel (Kooreman, 1994; Gruca & Nath, 2001;
Hu & Huang, 2004).
• Administrative staff (Byrnes & Valdmanis, 1994; Gruca & Nath,
2001).
• Ancillary staff (Byrnes & Valdmanis, 1994; Gruca & Nath, 2001).
• Purchased services and supplies (Banker et al., 1986; Gruca & Nath,
2001).
• Total assets (Grosskopf & Valdmanis, 1987; Rosenman et al., 1997;
Valdmanis, 1990, 1992).
In the education sector, the variables most widely used as inputs in

DEA have been:
• Academic staff or faculty/student ratio (Athanassopoulos & Shale,

1997; Avkiran, 2001; Bessent, Bessent, Charnes, Cooper, & Thoro
good, 1983; Hernangómez et al., 2007; Johnes & Johnes, 1993,
1995; Madden et al., 1997; McMillan & Datta, 1998; Rhodes &
Southwick, 1993; Urueña & Martín, 2012).
• Full-time equivalent student enrolment (Athanassopoulos & Shale,
1997; Hanke & Leopoldseder, 1998; Johnes & Johnes, 1993).
• Operating costs (Carrington et al., 2005; Stern et al., 1994).
• Total staff costs (Hanke & Leopoldseder, 1998; Stern et al., 1994).
• General expenditures (Ahn et al., 1988; Beasley, 1995; Coelli, 1996;
Hanke & Leopoldseder, 1998; McMillan & Datta, 1998; Post &
Spronk, 1999).
• Amount of equipment expenditure (Ahn et al., 1988; Beasley, 1995;
Hernangómez et al., 2007; Post & Spronk, 1999; Urueña & Martín,
2012).
• Instructional expenditures (Ahn et al., 1988; Bessent et al., 1983;
Breu & Raab, 1994).
• Total administrative costs (Casu & Thanassoulis, 2006; Coelli, 1996;
Hernangómez et al., 2007; Urueña & Martín, 2012).
• Expenditure on library and computing services (Athanassopoulos &
Shale, 1997; Hernangómez et al., 2007; Rhodes & Southwick, 1993;
Urueña & Martín, 2012).
Application of DEA is far less widespread in the field of develop

ment cooperation, with most of the studies that have used this technique
employing it to gauge the efficiency of nongovernmental development
organizations (NGDOs), the efficiency of the two stages of the oper
ational process implemented by NGDOs (activities geared towards
fundraising and applying the resources obtained in order to carry out
projects), and the efficiency achieved when executing international
development cooperation projects. The following have been used as
outputs:
• Project expenditures (Golden, Brockett, Betak, Smith, & Cooper,

2012; Marcuello, 1999).
• Total funds raised (Golden et al., 2012; García & Marcuello,
2007).
• Number of projects (Hernangómez, Martín, & Martín, 2006; Her
nangómez et al., 2009; Martín et al., 2007; Martín, Martín, & Her
nangómez, 2005).
As regards inputs:
• Operating costs (Golden et al., 2012; Marcuello, 1999).

• Donations and grants (Golden et al., 2012; Marcuello, 1999).
• Number of volunteers (García & Marcuello, 2007; Marcuello,
1999).
• Administrative expenses (García & Marcuello, 2007).
• Income (García & Marcuello, 2007; Hernangómez et al., 2006,
2009; Martín et al., 2005, 2007).
• Number of employees (García & Marcuello, 2007; Hernangómez
et al., 2006, 2009; Martín et al., 2005, 2007).
• Age of the organization (Hernangómez et al., 2006, 2009; Martín
et al., 2005, 2007).
From the empirical works mentioned that have applied DEA in the
nonprofit sector, mainly in the case of hospitals, health centers, universi
ties, primary and secondary schools, and NGDOs, the diversity of meas
ures employed to characterize the inputs used by these organizations as
well as the outputs they generate is evident and reflects the complexity
of their production function and the multiplicity of objectives they seek
to achieve.
Conclusions
Efficiency is a fundamental concept in the business world. Yet in NPOs,
which are mainly financed through donations, it should be even more
important, particularly when public funds are involved. As has been seen,
measuring efficiency in NPOs is more complex than in companies as it
is not possible to resort to measures related to profitability or profit.
Having measures that actually capture NPOs’ mission and quantify their
objectives, without being confined to merely verifying compliance with
certain accounting items and attaining certain ratios that reflect expendi
ture distribution—such as accounting measures based on the analysis of
ratios—emerges as one of the major challenges these organizations face
when responding to the growing demands for efficiency from different
areas. This points to the need to define the critical inputs and outputs
required to carry out such a measurement.
The literature has suggested that for NPOs to improve their govern
ance and management practices, and in order to introduce competition
in donation markets, they must provide high-quality, transparent, and
widely accessible accounting information (Thornton & Belski, 2010).
Nevertheless, this would be the necessary condition. The sufficient condi
tion requires that, in addition to providing better accounting informa
tion and evidencing the effectiveness of their actions, efficiency must also
be assessed in order to determine at what price the objectives are being
achieved. This is an aspect which the third sector is far from guaranteeing
at present.
In a context of multiple inputs and outputs, DEA is an appropriate
method to calculate efficiency, both globally for NPOs and at a particu
lar level for the different projects/products/services involved. By apply
ing this method, inefficient units can be identified, as can the reasons
that generate their inefficiency, which inputs are being used in excess,
and to what degree their consumption must be reduced in order to
make the organization or project/product/service efficient. DEA also
identifies the efficient organizations and projects/products/services with
which the inefficient units must be compared in order to determine how
much and in which aspects they need to improve so as to make them
fully efficient.
This measure allows a ranking of organizations to be established
which other approaches fail to provide. Such a hierarchy would prove
extremely useful as it identifies the best practices associated with high lev
els of efficiency, pinpoints which organizational designs and management
systems produce the best results, as well as which production objectives
and factor consumption objectives inefficient units must reach to be cata
loged as efficient. Finally, it helps public authorities to establish policies
and regulations that have shown their usefulness and, ultimately, redi
rects donations towards those entities which make the best use of them.
Consequently, use of the efficiency measure provided by DEA on an
ex-post basis would make it possible to specifically assess the results
achieved by each organization and to propose future corrective actions.
It would also serve as an ex-ante selection criterion for donors when
making their contribution to those NPOs which make fullest use of the
resources donated.
In this way, assessing and making public the results obtained in terms
of efficiency would increase competition among organizations when
attracting resources, forcing them to follow a process of continuous
improvement and greater transparency in their operation that would help
to dispel any doubts which may arise amongst donors. This would ulti
mately increase the income obtained through donations.
Despite the above, we do not wish to convey the idea that the respon
sibility of NPOs is limited to achieving a certain level of performance to
present to donors, given that there is a risk of incurring what Kramer
(1981) calls ‘goal deflection’ or ‘displacement of the ends by the means’
because, as Frumkin and Clark (2000) suggest, efficiency must be a means
towards the end of better fulfilling the mission in hand.
Notes
1. In the nonprofit sector, the prices of inputs and outputs are very difficult to
establish in advance and, sometimes, even a posteriori, which forces us to
discard parametric techniques such as stochastic frontiers, which are widely
accepted in business.
2. Pareto efficiency criterion is used: a unit is efficient if no other unit obtains
higher levels of one output without producing less of another output and
without increasing the use of any inputs. Or, if no unit produces the same
amount of outputs using less of some input without increasing the use of oth
ers (Charnes et al., 1978).
3. It is necessary to show that the allocative and technical efficiency calculated
with DEA are totally different from the accounting measures which, with the
same denomination, we previously defined as two ratios; the percentage that
expenses represent in projects on total income, and the percentage that admin
istration expenses represent over total expenses.
4. A greater number of variables in relation to the number of observations in the
sample increases the probability that the units will be efficient in any of the
variables.
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4 Governance and Its Effect
on Philanthropic Income
Marc Jegers
Introduction to the Relevant Concepts and Mechanisms

Generally speaking, governance can be defined as the set of measures
and organizational arrangements designed to safeguard stakeholders’
interests. In the present chapter, we specifically look at the impact of
governance on philanthropic funding, the underlying assumption (to be
interpreted in a ‘ceteris paribus’ way) being that effective governance in
line with the funders’ interests generates the funders’ perception that the
organization is pursuing the ‘right’ objectives, inciting them to be more
generous.
Fully mapping stakeholders of nonprofit organizations (NPOs) reveals
the distinction between internal and external stakeholders to be relevant
(Van Puyvelde, Caers, Du Bois, & Jegers, 2012). Internal stakehold
ers comprise (voluntary) board members, managers, and employees,
whereas at least three types of external stakeholders can be distinguished:
funders, beneficiaries, and suppliers. Pursuing the objectives of each of
them mostly implies compromising between them, introducing some
implicit or explicit hierarchy of stakeholders and their objectives, even
although one group of stakeholders might internalize the objectives of
another group, such as, e.g., funders pushing the organization to prior
itize beneficiaries’ interests.
As said, we focus in the present chapter on the organization’s funders,
of which we consider three groups: private donors, corporate donors,
and, to a limited extent, public donors, excluding the ‘earned income’
generated by sales of goods or services. Absent a comprehensive theoreti
cal framework, in what follows the empirical literature on the relation
ship between governance and funding will be reviewed at a conceptual
level (as comparing numerical effect values would be comparing the
incomparable, given the diversity of samples, periods, and estimation
techniques encountered in the different papers), and some theoretical
speculations will be proposed. It will become clear that the bulk of the
available empirical work does not articulate the logical chain described
above between governance and funding, but limits itself to look at the
Governance and Philanthropic Income 41
direct relationship between both, leaving a wide avenue for further
research. Further, some papers look at overall revenues without mak
ing a distinction between the different sources of funds. Finally, gov
ernance is frequently (but certainly not exclusively) operationalized by
looking at some board characteristics, although the concept and reach
of governance goes beyond the functioning of the board, as exemplified
by the ‘Governance Self-Assessment Checklist,’ validated for NPOs by
Gill, Flynn, and Reissing (2005), containing 12 categories, just one of
which is board effectiveness. Obviously, looking at the board is not a
problem as such, although merely integrating the research conclusions
from studies made in different countries may not always be warranted,
as board membership of (big) donors is more common in some countries
(such as the United States, to which, for that matter, most of the studies
reported below pertain) than in other ones (such as in Continental Euro
pean countries). Zimmerman and Stevens (2008, p. 194), for example,
establish that in their sample of 448 South Carolinian organizations 69%
of the boards ‘contribute to fundraising.’ A less outspoken result is found
by Hager, Rooney, and Pollak (2002), also for the U.S.,1 reporting that
scored on a scale between 1 (not involved) and 5 (extremely involved) the
average involvement of board members in fundraising is about 3.
The Empirical Literature on Governance-Income

Relations
The Board
Board Size
Board size is a popular parameter in board related governance research
and is also found in researchers probing into the link between govern
ance and funding. Based on the available empirical results (all of them
pertaining to the U.S.), this link is positive, in different forms: board size
and donations (Aggarwal, Evans, & Nanda, 2012;2 Harris, Petrovits, &
Yetman, 2015),3 change in board size and change in donations (Aggarwal
et al., 2012), and size and change in direct contributions (defined as pri
vate donations less funds raised by other organizations; Callen, Klein, &
Tinkelman, 2010).4 In the light of previous governance research, it is sur
prising that the relationships estimated are all linear, whereas one might
expect some countervailing effects to appear once some threshold board
size is reached.
As in the research referred to organizational size is controlled for, it
is hard to find a theoretical reason why board size exceeding the level
one can expect given the organization’s size should spur donors’ trust,
unless one assumes that more eyes are better than less to detect mis
appropriation of resources, even though this runs counter to the idea
42 Jegers
of non-linearity, well-established in the governance literature. Probably
some trade-off between the benefits of more control and the disadvan
tages of diluted attention is at work here.
Board Composition
As far as could be ascertained, only Callen et al. (2010) delve into the
relationship between board composition and donations. In their sample,
direct contributions (defined above) are positively related to the share of
the board occupied by staff members, the more so when the organiza
tion is unstable. Maybe surprising, there is no effect of major donors
being board members (but see below). Obviously, one might expect that
rational donors expect boards to fulfill their governance duties in a trust
worthy way, and that their perception of this is affected by the expertise
collected in the board. Looking at it from this point of view, one could
argue that staff, because of its day-to-day involvement in the organiza
tion’s operations, is more apt to propose sensible strategies, especially in
turbulent circumstances.
Fundraising Committee Composition

Callen et al. (2010) also establish that major donors being members of
the fundraising committee has a positive effect on direct contributions
growth. The fact that the effect is on growth of contributions and not on
levels of contributions is maybe surprising, as if major donors being in
the fundraising committee bolsters perceived trust through time, making
more people donate and/or people donate more.
Remuneration
In the sense that the board decides upon the way management is remu
nerated (and probably also indirectly on how the other members of staff
are paid), it has a powerful weapon to steer organizational behavior,
potentially signaling to external stakeholders (such as donors) the inten
sity with which it attempts to have stakeholders’ objectives pursued.
Looking at the, admittedly scant, available data, one indeed sees a rela
tionship between (top management) wages and donations. Harris et al.
(2015) find that the presence of compensation policies “such as review
and approval by independent persons, use of comparability data, and
contemporaneous substantiation of the deliberation and conclusion”
(Harris et al., 2015, p. 589) goes together with more donations. Galle
and Walker (2016)5 document a 10% decrease in donations for organi
zations of which managerial wages are widely publicized. Balsam and
Harris (2014)6 find a comparable result: higher managerial remunera
tions mentioned in press releases have a downward effect on donations.
In another study, the same authors (Balsam & Harris, 2018, p. 1710)7
also find that donors “react to bonus pay by reducing future donations.”
Accountability
A lot has been written on nonprofit accountability, which is mentioned
here as it refers in its minimal interpretation to the presence or absence
of systems to report to stakeholders whether and how their objectives
are pursued, to which in a more elaborate interpretation participatory
elements are added. That information asymmetries related to this issue
between funders and the organizations are substantial is illustrated by
Bennett and Savani (2003), who asked 286 potential donors to estimate
the percentage of total costs of well-known U.K. NPOs to effectively
reach the beneficiaries. The average answer was 46%, whereas the cor
rect value was 82%.
Gugerty (2009) discusses 32 voluntary accountability programs, of
which five include explicit standards with respect to fundraising. Unfor
tunately, their effect on fundraising is not assessed. This is what Berman
and Davidson (2003)8 accomplish, not finding any significant effect of an
accountability rights index on donations, leading them to the, possibly
controversial, conclusion that “donors do not care about the usage of
funds” (Berman & Davidson, 2003, p. 428).
Financial Reporting and Auditing

A specific way to account for the use of (financial) resources is through
disclosure of financial information and safeguarding its quality. In the
sense they contain organizational behavior away from organizational
objectives, accounting and auditing can be considered as (partial) gover
nance mechanisms, the costs of which are borne by the organization.
First of all, the effect of the (published or publicly available) data them
selves on income or donations can be considered. Most of the literature
finds a positive effect on donations of variables reflecting in one way or
another the share of program expenses in total expenses (for an overview,
see Jegers, 2018, pp. 100–101).
However, perceived financial data quality also plays a role: the higher
perceived quality, the stronger the effect of financial indicators on dona
tions (Thornton & Belski, 2010;9 Tinkelman & Mankaney, 2007;10
Yetman & Yetman, 2013).11 Some authors look at the effect of being
audited, which can be seen as one of the ways to assure financial data
quality. The results available show a direct positive effect on donations
(Harris et al., 2015; Neely, 2011)12 and a reinforcing effect on the rela
tionship between financial indicators and donations (Thornton & Belski,
2010). An additional positive effect on donations by having appointed a
Big (at that time) 5 auditor is documented by Kitching (2009).13
44 Jegers
Excessive Managerial Control
Too powerful managers can be perceived by potential donors as ena
bling a too high expropriation risk against which no effective governance
exists. That is exactly what is found by Bae, Kim, and Kim (2012)14 for
Korean universities: managerial control exceeding the share of contribu
tions goes together with lower donations per student (net of foundation
contributions). The relationship between ‘good management,’ in which
they include ‘no relatives,’ and higher donations found by Harris et al.
(2015), in fact tells the same story.
External Governance
External governance mechanisms can be defined as systems outside the
NPOs fulfilling a governance role in the sense that they are meant to
provide the necessary incentives to the organizations not to neglect stake
holders’ interests, donors obviously being one group of stakeholders in
this case.
In some countries, watchdog websites covering and rating NPOs are
prominently present on the donor market. The information they provide
can be interpreted as a means to reduce the potential donor’s search costs
for information perceived as relevant to them (Wong & Ortmann, 2016).
However, Cnaan, Jones, Dickin, and Salomon (2011)15 observe that less
than one fourth of the donors consult these websites before donating.
Silvergleid (2003) provides a description of U.S. watchdog websites and
finds16 mixed results as to their effect on donations. Gordon, Knock, and
Neely (2009),17 on the other hand, find a positive correlation between
rate changes and both donation levels and changes, as do Chen (2009)18
and Yörük (2016),19 who only looked at levels. In the latter study, this
effect, however, was not present for organizations the scores of which in
the ranking system were close to the threshold levels to be awarded an
extra ‘star.’ Interestingly, only looking at small organizations, for which
information asymmetry can be assumed to be substantial, moving from
‘three stars’ to ‘four stars’ goes together with donation increases as high
as 30%.
In a way, scandals becoming public through traditional and modern
news media is a limiting case of ‘watchdogging,’ and, according to Bottan
and Perez-Truglia (2015),20 does not stimulate donations, as they find the
negative effect of publicized scandals on donations to Catholic organi
zations in the U.S. being even larger than the direct costs to the church
generated by them.
Apart from watchdog websites, other forms of external governance
mechanisms might have an effect on donations. Galle (2017)21 documents
that, for foundations, the possibility for donors to sue “wayward manag
ers of nonprofits” (Galle, 2017, p. 413) increases donations by between
5.5% and 14.7%, depending on the specification used. Moreover, this
goes together with a reduction of administrative overhead, at least giving
the impression that governance costs are externalized.
Differentiating Donors
In the above sections, donors were considered to be alike, but, obviously,
nothing is further from the truth. Two, partly overlapping, distinctions
are made in the literature: large versus small donors, and sophisticated
versus unsophisticated donors.
As to size, Harris et al. (2015, p. 597) note that “[o]verall . . . large
donors are more likely to consider governance than are small donors,”
based on the observation that for these donors most of the governance
factors are positively related to direct donations. This is in line with the
observation by Cnaan et al. (2011) that consulting watchdog websites
is mostly done by the larger donors. Harris et al. (2015), however, also
note for large donors a negative relation between ‘good management’
and financial transparency on the one hand, and direct donations on
the other.
According to Balsam and Harris (2014), donations by sophisticated
donors are not only affected by press releases on managerial benefits
(see above), but also by the (mandatory) disclosure in the organizations’
financial statements.
Causality
Despite the fact that most of the studies retrieved apply panel estima
tion techniques, no undisputable ‘smoking gun’ is found to fully unveil
a mechanism going from governance to donations. Moreover, other fac
tors may interfere, such as the impact of subsidies/grants on governance
together with their impact on donations (crowding-in or crowding-out;
see Chapter 7). Harris et al. (2015, p. 600) find that “better govern
ance is associated with more government funding,” which would imply
that when crowding-out would prevail less donations will be collected.
Guo (2007)22, on the other hand, finds the opposite result, namely that
subsidies go together with decreasing governance quality, in that gov
ernance quality is narrowly measured as community representation on
the board.
Conclusion
In the present chapter an attempt is made to bring together in a systematic
way the empirical knowledge on the link between governance and dona
tions. Given the rather modest number of available (peer reviewed) pub
lications, applying widely diverging methods, definitions, and variable
46 Jegers
operationalizations, any general conclusion from this exercise can only
be provisional, all the more because almost all work is executed with
data pertaining to the U.S.
I think it is fair to say that there is at least a strong impression that
governance configurations influence donors (and donations). How
ever, the exact way how this works needs further unraveling, not only
from an empirical point of view, but even more urgently from a the
oretical point of view. Therefore, a vast future research program is
suggested.
Notes
1. 1,540 organizations (U.S.; surveyed in 2001).
2. 159,594 organization-years on 35,945 organizations (U.S.; 1998–2003).
3. 15,872 organization-years on 10,846 organizations (U.S.; 2008–2010). In
the Harris et al. (2015) paper, seven governance factors are derived: policies
(conflict of interest policy, whistleblower, etc.), audit, compensation policies
and committees, board (size, independence), management (no outsourc
ing, no relatives, presence, etc.), financial transparency, and availability of
minutes.
4. 123 large New York state NPOs (1992–1996).
5. About 6,500 organization-years (U.S. nonprofit institutions for higher educa
tion; 1997–2010).
57% of the organizations report to have paid at least once a bonus to their
most earning manager, the average amount of which was 21% of total
compensation.
8. 135 organizations (Australia; 1996).
9. 304,082 organizations (U.S.; 1998–2002).
10. 469,525 organizations and a restricted sample of 27,602 organizations (U.S.;
2000–2001).
11. 37,349 organization-years (U.S.; 1992–2007).
12. 1,070 Californian organizations (U.S.; 2003, 2005). The effect, how
ever, is statistically weak (p = 10%) and disappears after removing three
outliers.
13. 1,342 organization-years (U.S.; 1995–2002). However, in the special case
of the aftermath of the collapse of Arthur Andersen, Harris and Krishnan
(2012), 3,115 organization-years within the 1,000 largest U.S. organizations
(1999–2004), do not observe a negative effect on donations.
14. 93 universities (Korea; 2001–2003).
15. 6,418 donor-years (U.S.; 2006–2008).
16. More than 300 national organizations and more than 120 locally (Minne
sota) focused organizations (U.S.; 1997–2000).
17. 405 organizations receiving at least yearly public support exceeding $500,000
followed by the U.S. watchdog website Charity Navigator (U.S.; 2007).
18. 600 NPOs based in New York (U.S.; 2005–2006) followed by Better Business
Bureau. The standards they use include governance items.
19. 5,400 organizations ranked by Charity Navigator (U.S.; 2004–2010).
20. 175,415 observations on 25,668 zip-codes/counties (U.S.; 1997–2008).
21. 1,326,233 foundation-years (U.S.; 1989–2012).
22. 95 Los Angeles charities (U.S.; 2002).
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5 Accountability,
Transparency, and
Voluntary Disclosure in
Nonprofit Organizations
María del Mar Gálvez-Rodríguez, Manuel
López-Godoy, and María del Carmen
Caba-Pérez
Introduction
Whilst the primary concern of nonprofit organizations (NPOs) is to legiti
mize their social existence, entities within this sector are particularly vulner
able due to their reliance on the trust and confidence that key stakeholders
such as donors, public administration, and volunteers, as well as the pub
lic at large, have placed in the sector (Burger & Owens, 2010).
Accountability is crucial for gaining, reinforcing, and repairing legiti
macy. Accountability is a complex and dynamic term which in general
terms encompasses the NPO’s responsibility for actions taken both at
an external level to meet the expectations of stakeholders and at inter
nal level towards the entity itself, as a tool for self-assessment (Ebra
him, 2003). For authors such as Ebrahim (2010), Murtaza (2012), and
O’Dwyer and Unerman (2010), the execution of accountability practices
involves transparency, answerability/justification, control, sanction or
reward, and learning.
In the current literature on accountability management in NPOs, three
growing concerns can be identified. The first concern is centered around
the actual influence of information disclosed by the organization on a
voluntary basis and its importance to stakeholders when deciding if
they will trust the organization and engage with their social cause (Li &
McDougle, 2017). Furthermore, the emerging phenomenon of social net
working sites forces NPOs to revise their web communication strategies
in order to enhance the organization’s capability to meet the information
needs of stakeholders. This leads to questioning the relative importance
of web pages versus social networking sites (Alonso-Cañadas, Galán-
Valdivieso, Saraite-Sariene, & Caba-Perez, 2019; Hoefer & Twis, 2018).
Another issue that still arises in the literature is the question of what type
of information NPOs should disclose to attain an adequate accountabil
ity (Cabedo, Fuertes-Fuertes, Maset-Llaudes, & Tirado-Beltrán, 2018;
Tripathi & Verma, 2018).
50 Gálvez-Rodríguez, López-Godoy, and Caba-Pérez
This chapter aims to provide a state of art in these issues and more
specifically addresses the following questions:
• Is organizational transparency important to donors and public

administrations?
• Are websites still important despite the growth of social networks?
• How can voluntary disclosure be measured?
Is Organizational Transparency Important to Donors and

Public Administrations?
Transparency truly adds value to donors and public administrations
when it is oriented towards an adequate accountability. Hence, a clarifi
cation of the role that transparency has on the concept of accountability
should be carried out in addition to delving further into attitudes towards
accountability.
Transparency is a broad concept that implies information made avail
able by the organization (Marcuello, Bellostas, Marcuello, & Moneva,
2007). Transparency can be opaque or clear (Fox, 2007). The latter gen
erates accountability, implying responsibility, and provides an answer to
stakeholders’ information needs. Accountability practices aim to justify
the actions of NPOs, have them be evaluated on the results they obtain,
and, as a consequence, permit them to be sanctioned or awarded mainly
through the attainment of external funding and legitimacy. On the other
hand, accountability should also be implemented as a learning tool to
improve the NPO’s mission (Ebrahim, 2010; Murtaza, 2012; O’Dwyer &
Unerman, 2010).
The attitude and manner of being accountable can be either reactive or
proactive. The reactive manner implies the disclosure of information that
is conditioned by a previous request, and it is an organizational behavior
that denotes a desire for information privacy. In proactive accountability,
the information is disclosed periodically independently of whether or not
it has been previously requested. This proactive disclosure of information
generates value for NPOs’ stakeholders (Costa & Goulart da Silva, 2019;
Gálvez-Rodríguez, Caba-Perez, & López-Godoy, 2014).
The effect of proactive accountability in donors and public adminis
trations is a reduction of information asymmetries regarding the man
agement of the organization. Delving further into the donors’ point of
view, Saxton, Neely, and Guo (2014) have evidenced a positive relation
ship between the level of charitable contributions that an NPO receives
and the proactive disclosure of information via web sites in the previ
ous period. Other studies have identified the reasons for that positive
influence, identifying perceptions that donors have of accountability
and indicating its usefulness for monitoring how monies are spent in
accordance with their social causes as well as to check how an NPO is
Accountability, Transparency, and Disclosure 51
attending to a social need (Connolly & Hyndman, 2013; Populus, 2016).
In addition, divulging information that demonstrates the NPO’s compli
ance with its responsibilities, based on its regulatory framework, is also
welcomed by donors, specifically to recognize the professionalism of the
organization (Connolly & Hyndman, 2013; Striebing, 2017). For donors
who volunteer their time, accountability helps them to understand and
learn about the social causes of the organization and is an effective tool
for ensuring the provision of better volunteer services (Christensen &
Ebrahim, 2006).
With respect to public administrations, these are salient stakeholders
as they have the power to influence NPOs due to their legislative role
and as significant resource providers (often on a contractual basis for ser
vices) (Hyndman & McMahon, 2010). A significant difference between
public administrations and individual donors is that the former have a
greater appreciation for more quantitative accountability. The account
ability measures taken by NPOs are also useful for public administra
tions as a pre-post control system for granting funds or tax exemptions
(O’Dwyer & Boomsma, 2015). Moreover, accountability helps improve
government/NPOs relations. In some specific cases, proactive account
ability is considered to be useful for supplementing the lack of regulatory
framework in certain accountability aspects (Bies, 2010; Sidel, 2010).
Are Websites Still Important Despite the Growth of Social

Networks?
The ability to be accountable strongly depends on adequate communi
cation systems (Alawattage, How, & Tibbetts, 2011). In this respect,
Internet resources provide availability, low cost, and accessibility of infor
mation as well as new interaction avenues that allow NPOs to enhance
accountability (Kim, Chun, Kwak, & Nam, 2014).
The use of websites has been the first big step towards online commu
nication models (Ozcelik, 2008). This was followed by the use of Web
2.0 tools (Greenberg & MacAulay, 2009). More recently, the presence of
social networking sites has become an emergent phenomenon in the vir
tual environment (Alonso-Cañadas et al., 2019). These more recent tech
nologies are online platforms that include several Web 2.0 tools such as
video files and postcards that foster the collaboration, joint learning, and
exchange of information amongst users. Among the available platforms,
Facebook, Twitter, and YouTube are the most utilized by the nonprofit
sector (Kim et al., 2014; Tripathi & Verma, 2018).
With a view towards improved transparency which can lead to greater
accountability, some differences between websites and social network
ing sites are identified. Websites are hierarchical and centralized mass
communication tools (Eimhjellen, Wollebæk, & Strømsnes, 2014), where
NPOs disseminate large volumes and diverse information in order to
satisfy the information needs of those inside and outside the organiza
tion (Gandía, 2011; Hoefer & Twis, 2018). In addition, websites have
evolved to include two-way communication tools (e.g., emails, forums,
links) for providing a high level of accessibility that will not lose visitors
who would otherwise ‘bounce out’ of the website and seek out an alter
nate organization where their questions could be answered more readily.
This evolution is highly recommended as it fosters stakeholders’ engage
ment with the NPO’s mission (Dumont, 2013; Hoefer & Twis, 2018).
Social networking sites use a decentralized communication model that
implies a loss of full control over content generated via a network. They
possess unique attributes for generating ‘many to many’ communication
which include the capacity to expand social connections by displaying
one’s social connections to others and vice versa (Kim et al., 2014). By
means of these social networking sites, NPOs can explain and justify
their actions in a more informal manner, thus providing new channels
for a ‘closer’ accountability (Gálvez-Rodríguez, Haro-de-Rosario, &
Caba‐Pérez, 2019). In particular, by means of these platforms, NPOs
can benefit from a helpful channel for exchanging ideas between peers,
for exchanging feelings of gratitude between the NPOs and stakehold
ers (such as volunteers) and vice versa, and for promoting discussion
between individuals and organizations (Tripathi & Verma, 2018).
Looking at the extant literature on the comparative analysis of the
use of websites versus social networking sites, it is observed that NPOs
make greater use of websites than social networking sites for information
disclosure and dialogic purposes. In general, websites more often contain
information about the organization’s profile (Kim et al., 2014), activi
ties carried out (Eimhjellen et al., 2014), strategy, and economic-financial
management (Waters & Feneley, 2013). Likewise, NPOs incorporate Web
2.0 technology tools such as regularly scheduled news forums, FAQs, or
calendars of events in their websites and utilize these more often than
social networking sites (Kim et al., 2014). Hence, social networking sites
appear to play a secondary role by mainly supplementing the dialogic
features that are limited on websites and thus take advantage of their
unique ‘comment or posting function’ which provides ample opportunity
for user-response (Eimhjellen et al., 2014; Kim et al., 2014).
Despite this reality, an effective and efficient use of both websites and
social networking sites is fundamental for providing a complete account
ability that truly satisfies the purposes of different NPO stakeholders. In
this sense, websites have a clear role in information disclosure (from NPO
to stakeholders) and social networking sites should be a springboard for
boosting and spreading such information (via website links in posts, etc.).
In this regard, previous authors warn that NPOs should not waste the
potential of social networking sites, because they share more information
concerning external topics rather than solely focusing on being account
able for the organization’s actions (Maxwell & Carboni, 2016).
In addition, despite the progress of websites in providing a greater
degree of answerability to stakeholders via the use of Web 2.0 technolo
gies, there is no doubt that social networking sites possess formidable
attributes for staying in touch with stakeholders and thus fostering greater
levels of informal accountability (Gálvez-Rodríguez et al., 2019). Foster
ing interactions via social networking sites is crucial for being transpar
ent and demonstrating the sense of NPOs’ organizational responsibility.
Based on current literature, it seems that much more effort should be
made in this regard as the volume of stakeholders’ interactions with the
social networking sites of NPOs can still be improved (Alonso-Cañadas
et al., 2019).
How Can Voluntary Disclosure Be Measured?

Voluntary disclosure, as previously mentioned, implies that the NPO pro
vides organizational information to its stakeholders on a voluntary basis.
In this regard, based on Legitimacy Theory (Suchman, 1995), voluntary
information disclosure is carried out with the aim of reinforcing gener
alized perceptions of NPOs as agents that serve society (Christensen &
Mohr, 2003). To this end and according to Institutional Theory (DiMag
gio & Powell, 1983; Meyer & Rowan, 1977) and Stakeholder Theory
(Freeman, 1984; Mitchell, Agle, & Wood, 1997), NPOs adopt account
ability models from other sectors as an attempt to respond to the demand
for information, not only from legislators, but also from other stakehold
ers (Lister, 2003; Verbruggen, Christiaens, & Milis, 2011). In line with
Resource Dependence Theory (Froelich, 1999; Pfeffer & Salancik, 1978),
in general terms, the running of an NPO relies on fundraising, from both
individual contributors and large donors, and on external human capital
(volunteers). As a result NPOs opt to voluntarily disclose information as
part of the strategy to ensure their survival (Bies, 2010).
Voluntary information disclosure as a means of increasing account
ability is strongly linked to power relationships between the organization
and its stakeholders (Porter, 1980). In practice, most NPOs are likely to
invest greater effort in upward accountability (Bies, 2010; O’Dwyer &
Unerman, 2008). However, proper voluntary disclosure should have a
360 degree view. This implies disclosing information that corresponds to
the information needs of those stakeholders who are important for the
organization’s survival as well as those who are part of the organization’s
value creation (Murtaza, 2012).
Hence, voluntary information disclosure should be oriented towards
a more holistic accountability (O’Dwyer & Unerman, 2008). To meas
ure this, and based on a literature review, NPOs should be transparent
regarding six dimensions: transparency of organizational profile, trans
parency of organization governance, transparency of organizational
performance, transparency of economic and financial management,
Table 5.1 Dimensions to Measure NPO Transparency
Dimensions Authors
Organizational profile Gandía (2011); Greenberg and MacAulay

(2009); Ingenhoff and Koelling (2009); Kang
and Norton (2004); Taylor et al. (2001).
Governance Ebrahim (2010); Gandía (2011); Gálvez-
Rodríguez et al. (2012a); Jordan (2005).
Performance Andreaus and Costa (2014); Cabedo et al.
(2018); Goatman and Lewis (2007); Hyndman
and McConville (2018); Kang and Norton
(2004); Lee and Joseph (2013); Tripathi and
Verma (2018); Waters (2007); Waters et al.
(2014).
Economic-financial Andreaus and Costa (2014); Connolly and
management Hyndman (2013); Gandía (2011); Gálvez-
Rodríguez et al. (2014); O’Dwyer and
Boomsma (2015); Saxton et al. (2014); Saxton
and Guo (2011).
Social responsibility Dumay et al. (2010); Gálvez-Rodríguez et al.
(2012b); Gray (2006, 2010); Jones and
Mucha (2014).
Stakeholder Ebrahim (2010); Goatman and Lewis (2007);
participation O’Dwyer and Unerman (2010); Waters
(2007).
Source: Compiled by the authors, based on their literature review
transparency of organizational social responsibility, and transparency of

stakeholder-participation (see Table 5.1).
Transparency of organizational profile relates to the NPO’s visible dis
closure regarding its history, contact data, alliances and network with
other organizations (Greenberg & MacAulay, 2009; Ingenhoff & Koe
lling, 2009), the legal structure of the organization, and the social base
(contracted employees, volunteers, beneficiaries) that support the organ
ization (Gandía, 2011). In this ‘introduction’ to the organization, the
procedures to become affiliated and contribute financially to the organi
zation in order to enhance the potential stakeholders’ involvement are
very welcome (Kang & Norton, 2004; Taylor, Kent, & White, 2001).
With regards to transparency of organization governance, some
authors and self-regulation initiatives of NPOs state the importance of
providing information about board members and the management team,
compensation of board members, and family relations as well as rela
tionships with members of the board and with the management team
(Gálvez-Rodríguez, Caba Perez, & Lopez Godoy, 2012a; Jordan, 2005).
In addition, visibility of good governance practices aimed at preventing
or avoiding potential conflicts of interest among different stakeholders
(Ebrahim, 2009) such as internal rules and minutes of board meetings are
also recommended (Gandía, 2011).
Transparency of organizational performance implies disclosing infor
mation about key aspects of organizational strategy as well as the
outcomes achieved to demonstrate the effectiveness of projects (Hynd
man & McConville, 2018). Hence, stakeholders must be informed of
the NPO’s mission and vision (Andreaus & Costa, 2014; Goatman &
Lewis, 2007; Kang & Norton, 2004; Waters, 2007). Based on the mis
sion and vision, NPOs should provide information about their strate
gic plan (Connolly & Hyndman, 2013) and how this strategy is being
realized in current (Cabedo et al., 2018) and future projects (Tripathi &
Verma, 2018). To this end, not only is it important to provide quantita
tive data (numerical outputs on the impact of the project carried out)
(Hyndman & McConville, 2018) but also qualitative data such as stories
or testimonies (Waters & Feneley, 2013). A basic report used to compile
a great number of the aforementioned aspects is the annual report pub
lished by the NPO (Lee & Joseph, 2013).
Transparency of economic and financial management is the process of
reporting on costs and revenues received for the delivered social services
as well as on the financial equilibrium or the balance between invested
capital and sources of collateral (Andreaus & Costa, 2014). On this issue,
there is a vast amount of literature that supports the publication of audit
reports, financial statements, and other data that show the compliancy
of the NPO with respect to their taxation duties. It also includes the need
for publishing the NPO’s budget, allocation of resources, and sources
of funding (Gálvez-Rodríguez et al., 2014; Gandía, 2011). Although
this information seems to become more important to larger or publicly
funded institutions than to individual donors (Connolly & Hyndman,
2013; O’Dwyer & Boomsma, 2015; Saxton et al., 2014), NPOs should
not forget the visibility of this aspect to ensure that funds are allocated
appropriately and thus mitigate any apparent prejudice towards the sec
tor regarding misappropriation of funds.
In the transparency of social responsibility, NPOs should communi
cate to their stakeholders and to the larger community their responsibil
ity for the positive and negative impacts, at an economic, social, and
environmental level of their activities. This responsibility is important
for all types of NPOs, as all organizations, to varying degrees, should
respond to society’s expectations and work towards becoming sustain
able and socially responsible organizations (Jones & Mucha, 2014). To
that end, NPOs should report on the programs and policies aimed at
social responsibility such as reducing consumption of resources, improv
ing treatment of employees, and increasing engagement with the com
munity (Gálvez-Rodríguez, Caba Perez, & Lopez Godoy, 2012b). Finite
measures of sustainability have not yet been developed, and it is likely to
be an impossible task (Dumay, Guthrie, & Farneti, 2010). In this respect
three approaches have been identified: managerialist, triple bottom line,
and the ecological and eco-justice approach (Gray, 2006, 2010). This
notwithstanding, there are still few studies that delve deeper into how
NPOs are addressing this dimension.
Transparency of stakeholder-participation in the organization pro
motes the participation of internal and external stakeholders in the
organization in order to obtain fruitful feedback on continued improve
ment (O’Dwyer & Unerman, 2010). This is part of the NPO’s relational
accountability to stakeholders by providing them with information
needed to react to the organization’s actions. This includes assessment
reports based on participation processes such as surveys, meetings and
forums, and other information that shows the participative procedures
carried out by NPOs to evaluate projects (Waters, 2007) as well as infor
mation access regarding the receipt and handling of complaints and
inquiries (Ebrahim, 2010; Goatman & Lewis, 2007).
Conclusions
Transparency is essential for generating a significant level of account
ability to NPOs’ key stakeholders, such as individual donors and public
administrations. As they are external stakeholders, a proactive disclo
sure of information is an effective mechanism for: monitoring processes,
knowing the benefits/impacts of an NPO’s activities, and learning how
the organization can be helped.
An effective accountability should be carried out with: 1) relevant
information disclosure; and 2) suitable communication systems. With
respect to what information should be disclosed, it is important to have
a holistic view because NPOs have multiple actors. Although six trans
parency dimensions are identified to measure an adequate information
disclosure towards accountability, not all have been discussed in the same
depth in the literature. In this regard, current literature points out the
importance of reporting on performance and economic and financial
management. Transparency on performance aims to demonstrate actual
benefits and/or impact of the project, without forgetting narrative infor
mation disclosure on future projects. Economic and financial issues seem
to attain greater attention from public administrations; however, their
management is important to avoid prejudice against the organization.
This is an expected information disclosure, that is to say, even if donors
do not read it or pay much attention to the information itself, they want
or expect it to be available.
Other dimensions are mentioned less frequently in the current litera
ture but should not be forgotten. In particular, the visibility of an organi
zation’s profile and the state of the NPO’s good governance practices.
In addition, there is still scarce literature on social responsibility trans
parency. Considering recent scandals in the sector, such as the Oxfam
sex scandal, greater effort in reporting ethical values of the organiza
tion is necessary. Moreover, not only should NPOs exert pressure on the
sustainability practices of corporations, they should also enable greater
visibility of these practices. Likewise, little attention has been paid to
the transparency on mechanisms that promote and increase participation
from stakeholders.
With respect to communication systems, it appears that social network
ing sites do not replace the primary place of websites with regards to
accountability and engaging with NPOs’ stakeholders in virtual environ
ments. Based on existent literature that compares the usage of both, web
pages are still the primary source for both information dissemination and
dialogic purpose. Nevertheless, more studies are needed to increase under
standing of the evolution in the use of both technologies due to the unstop
pable nature of the digital transformation currently taking place in society.
Moving forward, both web pages and social networking sites should
be part of the communication strategy. NPOs should consider social
networking sites as complementary tools to webpages. Nowadays, the
accountability model should comprise updating and energizing both
websites and social networking sites, albeit with an awareness that both
should empower different accountability. In this regard, websites are
more suited to a formal accountability and social networking sites should
be a springboard for boosting and spreading such information (via web
site links in post, etc.). By doing so, social networking sites serve to foster
a more ‘informal accountability,’ implying a ‘spontaneous accountability’
via interactive conversations. Related to this, previous authors observe
that stakeholders seek out informal information sources when deciding to
engage with NPOs, such as personal recommendations or by personally
verifying how NPOs are carrying out their social causes (Li & McDou
gle, 2017). Hence, social networking sites would be an excellent space to
generate trust and foster interactions, not only between the NPOs and
their users but also among the users themselves. In such interactions, the
NPO has the opportunity to justify or explain actions that have not met
users’ expectations.
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6 Nonprofit Organization
Reputation and Its Role in
Success
Antecedents and Effects
Esther de Quevedo-Puente and Clara
Pérez-Cornejo
Introduction
The business literature has shown that corporate reputation is one of
the most important intangible assets in companies (Hall, 1992, 1993).
Empirical research has found that corporate reputation is a source of
sustainable competitive advantages (e.g., Roberts & Dowling, 2002)
because it favors stakeholders’ cooperation with the company (Cable &
Turban, 2003; Keh & Xie, 2009; Walsh, Mitchell, Jackson, & Beatty,
2009). There is already an extensive body of research that has analyzed
the determinants and consequences of reputation in the for-profit sector
(e.g., Ali, Lynch, Melewar, & Jin, 2015). However, reputation-related
research on nonprofit organizations (NPOs) is still scarce. Nevertheless,
in the last couple decades, several factors have highlighted the relevance
of reputation for NPOs. On one hand, NPO reputation has gained impor
tance due to the rapid proliferation of NPOs around the world (Ebrahim,
2003; Gibelman & Gelman, 2001; Young, Bania, & Bailey, 1996) cou
pled with a progressive reduction of government grants (Valor, 2003) and
a drop in donations since the last recession (Ainsworth, 2008; Sarstedt &
Schloderer, 2010). On the other hand, NPOs have increased their collab
orative relationships with businesses (Van Huijstee & Glasbergen, 2008;
Wymer & Samu, 2003) in search of legitimacy and reputation, and there
have been a series of highly publicized scandals that have eroded pub
lic confidence in NPOs (Ebrahim, 2003). All these factors have created
growing interest in the management of NPO reputation. Indeed, a recent
survey of NPOs in Illinois revealed that enhancing their visibility and
reputation is a major challenge for most of these organizations (Grønb
jerg & Child, 2003; Laidler-Kylander, Quelch, & Simonin, 2007).
These factors have prompted some researchers to focus on analyzing
the determinants and consequences of reputation in the NPO context.
However, scholars have not reached consensus regarding how to define
and measure NPO reputation, which may stem from the heterogeneity
of the NPO sector. Of the three conceptualizations of reputation in the
NPO Reputation and Its Role in Success 63
business literature (Lange, Lee, & Dai, 2011, p. 155), NPO reputation
studies have focused on two of them: “being known for something” (i.e.,
reputation effectiveness) and “generalized favorability.” Both of these
conceptualizations have been translated into different measures of this
intangible asset in the literature on NPOs.
Therefore, because prior research on this topic is scarce and heteroge
neous, in this chapter, we review the NPO reputation literature to pro
vide an overview of the state of the art. The structure of the rest of the
chapter is as follows. The first section describes the different conceptu
alizations of NPO reputation and the ways previous studies have trans
lated them into measures and thus serves as a basis for the understanding
of the subsequent sections. The following section analyzes the benefits
derived from NPO reputation, mainly focusing on NPOs’ increased abil
ity to attract and maintain resources. The next section reviews research
contributions exploring the antecedents of NPO reputation. Finally, the
chapter closes with a discussion section.
Measurement of NPO Reputation

Despite practitioners’ and researchers’ interest in this increasingly
important topic, the discussion on how to measure reputation in the
NPO context is still limited (Sarstedt & Schloderer, 2010). There are
several scientific rankings and ratings that basically assess how trust
worthy organizations allocate donations, like the American Institute
of Philanthropy (www.charitywatch.org), the Better Business Bureau
(www.bbb.org), or the Charity Navigator (www.charitynavigator.org).
However, none of these approaches explicitly considers NPO reputation
(Sarstedt & Schloderer, 2010; Van Riel & Fombrun, 2007). There have
also been a few approaches in the prior literature attempting to build an
NPO reputation measure (see Tables 6.1 and 6.2), but none of them is
considered a widespread measure, as opposed to corporate reputation,
for which we can find consolidated rankings, such as Fortune’s Most
Admired Companies, Reptrak Pulse (Reputation Institute), and Merco
(in the Latin context).1
Most studies on NPO reputation have been based on definitions of
for-profit corporate reputation (e.g., Bennett & Gabriel, 2003; Mitchell,
2015; Sarstedt & Schloderer, 2010; Willems, Jegers, & Faulk, 2016).
More specifically, there are three main definitions of corporate reputa
tion (Lange et al., p. 155): being known (i.e., generalized awareness or
visibility of the firm; prominence of the firm in collective perceptions),
being known for something (i.e., perceived predictability of organiza
tional outcomes and behavior relevant to specific audience interests),
and generalized favorability (i.e., perceptions or judgments of the overall
organization as good, attractive, and appropriate). Of these, the NPO
literature has focused on the two last conceptualizations: ‘being known
Table 6.1 Effects of NPO Reputation
Reference Type of NPO Country Name of How Reputation Was Sample Method Impacts
Reputation Measured
Measure
Sargeant, Charities United Charity Items (measured on a Data were gathered Regression Charity reputation
Ford, Kingdom reputation five-point scale, where from a sample of analysis has no effect
and 1 = strongly disagree 5,000 donors to 10 on the total
West and 5 = strongly different categories amount donated
(2001) agree): of causes (500 to date, on the
1. I felt X had a good donors per charity amount given
reputation. where questioned). last year, nor on
2. I found X’s original the percentage
approach to be allocated to a
professional. particular charity.
3. I believed X’s
management to be
professional.
4. X spends a high
proportion of its
income on the cause.
5. I found X’s
communications were
very persuasive.
Padanyi Social service Canada Peer Items: Surveys were sent Covariance- An organization’s
and reputation 1. Reputation among to the executive based reputation
Gainer other NPOs for directors or general structural among managers
(2003) attracting skilled managers of 816 equation of similar NPOs
staff and committed (205 received) modeling influences
volunteers. social service (SEM) its success
2. Reputation among organizations in the in attracting
other NPOs for greater Toronto and resources
achieving their greater Montreal (p < 0.01).
mission. areas in Canada.
3. Reputation among
other NPOs for
attracting financial
resources.
4. Effectiveness of
your organization in
achieving its mission.
5. Sustainability of
your organization’s
program/activity/
service delivery.
Items were measured
on a five-point scale,
where 1 = declined
significantly,
2 = declined
somewhat, 3 = been
stable, 4 = increased
somewhat,
5 = increased
significantly.
Bennett Charities United Reputation Items (measured on five- The authors Regression Charity reputation
and Kingdom point scales): questioned 161 analysis enhances
Gabriel The charity: members of the individuals’
(2003) 1. Uses its assets wisely. general public overall
2. Is financially sound. about their impression of
3. Provides an perceptions of a charity
excellent service to the images and (p < 0.001).
beneficiaries. reputations “The charity uses
4. Is well managed. of major U.K. its assets wisely”
5. Is capable. charities. (reputation item)
(Continued)
Table 6.1 (Continued)
Reference Type of NPO Country Name of How Reputation Was Sample Method Impacts
Reputation Measured
Measure
6. Has a good long-term To test their positively affects
future. hypotheses, the the amount
7. Has excellent authors developed individuals give
employees. a questionnaire to charity over
and administered a two-month
it to 161 members period (p < 0.01).
of the public who
were considered
typical of people
who might donate
to charity.
Meijer Charities Netherlands Charity Items (measured on Data were gathered Multiple Charity reputation
(2009) reputation a five-point Likert by a large Dutch regression has a positive
scale): research agency. model and significant
1. The money given to The random effect on being
charity X goes to sample of the a donor of a
good causes. Giving in the charity or not
2. Much of the money Netherlands Panel (p < 0.001)
donated to charity is Survey consisted (binary logistic
wasted. of respondents regression).
3. My image of charity selected from Charity reputation
X is positive. 40,000 households positively affects
4. Charity X has been in the Capi@home the amount of
quite successful in pool. The final money donated
helping the needy/the questionnaire was (p = 0.076).
environment. answered by 287
5. Charity X performs donors and 472
a useful function in non-donors of this
society. population.
6. Charity X is well
managed.
7. Charity X shows
compassion.
8. I trust charity X.
9. Charity X is reliable.
10. Charity X is well
known.
Shier and Charities Worldwide Perceptions Items (measured on The inclusion Logistic Perceptions of
Handy of a a five-point Likert criterion for regression a fundraising
(2012) fundraising scale): participation in the platform (for
platform 1. Reputation. study was visiting which reputation
2. Feedback. the GiveIndia was one of
3. Information. website. In total, the items)
4. Trustworthiness. 738 surveys were positively affects
collected, but due individuals’
to non-response on willingness to
some of the items, donate online
479 were utilized (p < 0.01).
in the final sample.
Schloderer International Germany NPO This scale is the same This study drew Partial least Likeability
et al. NPOs: reputation as Sarstedt and on Sarstedt and squares (PLS) (affective
(2014) Red Cross, Schloderer (2010) Schloderer’s (2010) approach component of
Greenpeace, scale (see Table 6.2). data, collected (PLS-SEM) reputation)
UNICEF by the market positively affects
research institute individuals’
Psychonomics in willingness to
2009 (N = 984) by donate (p < 0.05)
means of an online and willingness
panel in Germany. to work as a
volunteer
(p < 0.05).
Table 6.2 Antecedents of NPO Reputation
Reference Type of NPO Country Name of How Reputation Sample Method Antecedents
Reputation Was Measured
Measure
Smith and Volunteer- United Reputational Peer nominations 32 self-administered Bivariate The following factors were
Shen (1996) managed States effectiveness received questionnaires and analysis statistically significantly
nonprofit of VNPOs from leaders seven interviews, (t-test)— associated with the
organizations of other for 39 protocols separate reputational effectiveness of
(VNPOs) responding in usable form variance VNPOs at the p < 0.10 level
VNPOs, answered by VNPO method—on or below:
where high leaders. the means of —Nature of group: public
(four or more two sets of or mixed (versus member)
nominations) VNPOs. benefit, outside clients
and low Ordinary Least or users, more clients or
(zero to three Squares users, older nonprofit, more
nominations) Multiple- revenues in the past year,
in rated Regression more revenues five years
effectiveness. Analyses earlier.
—Officers: president, vice
president, treasurer,
secretary.
—Board of directors: has
a board of directors, has
more board members,
board members know
by-laws, good attendance
at board meetings, board
members chosen for outside
relationships.
—Committees: presence
of committees, more
committees, more active
members of committees,
more committee members,
has nominating committee,
more careful selection of
committee chairs.
—Aspects of formalization:
presence of by-laws,
presence of formal
membership list, leader
group not mainly informal,
leader says group has tax
exemption, not tax-exempt
through affiliate, has formal
updated mission statement.
The multivariate results of the
seven strongest predictors
show that having by-laws
available (a formalization
measure), having
many active committee
members (a committee
structure, mobilization,
and volunteer staffing
measure), and having a
regularly revised board-
created formal mission
statement (a formalization
and board governance
measure) positively affects
reputational effectiveness.
Padanyi and Social service Canada Peer reputation See Table 6.1. Surveys were sent to the Covariance- Organizations’ peer reputation
Gainer executive directors or based SEM is affected by the following
(2003) general managers of nonprofit performance
816 (205 received) factors (p < 0.001):
social service —Client satisfaction.
organizations in the —Ability to partner with other
greater Toronto and NPOs.
greater Montreal —Effective governance.
areas in Canada.
(Continued)
Measure
Sarstedt and International Germany NPO reputation Reputation was This study sampled PLS-SEM Quality (p < 0.05),
Schloderer NPOs: measured the German general attractiveness (p < 0.05),
(2010) Red Cross, using two public. Overall, and organizational social
Greenpeace, components. 900 panelists responsibility (OSR) (p <
UNICEF 1. Affective were contacted 0.05) positively affect the
component to participate in affective component of NPO
(likeability): a study on NPOs reputation (likeability).
a. Identify conducted by a Performance (p < 0.05),
better with. major German attractiveness (p < 0.05),
b. Likeable university. A total and OSR (p < 0.10)
organization. of 984 evaluations positively affect the
c. Would were considered in cognitive component
miss if the analysis. of NPO reputation
no longer (competence).
existed.
2. Cognitive
component
(competence):
a. Recognized
worldwide.
b. Top NPO in
this market.
c. Performs at
a premium
level.
Items were
measured on
seven-point
Likert scales.
Schloderer International Germany NPO reputation This scale is This study drew PLS-SEM Quality (p < 0.05),
et al. NPOs: the same as on Sarstedt and attractiveness (p < 0.05),
(2014) Red Cross, Sarstedt and Schloderer’s (2010) and OSR (p < 0.05)
Greenpeace, Schloderer data, collected positively affect the affective
UNICEF (2010) scale by the market component of NPO
(see earlier in research institute reputation (likeability).
this Table 6.2). Psychonomics in Quality (p < 0.05),
2009 (N = 984) by performance (p < 0.05),
means of an online attractiveness (p < 0.05),
panel in Germany. and OSR (p < 0.05)
positively affect the
cognitive component
of NPO reputation
(competence).
Willems, Sociocultural Belgium Effectiveness Items (measured Survey data (online Covariance- The results reveal that
Jegers, reputation on a seven- questionnaires) came based SEM reputation effectiveness
and Faulk point Likert from 284 diverse is affected by trust (p
(2015) scale, where stakeholders of three < 0.01), stakeholders’
1 = very publicly funded level of satisfaction with
ineffective organizations communication (p <
and 7 = very in Belgium: 0.01), and stakeholders’
effective): “member” (64.8%), level of satisfaction with
1. Optimal use “volunteer” representation (p < 0.01).
of available (63.7%), “director,
resources. executive manager,
2. Deployment and/or member
of predefined of the leadership
strategy. team” (18.7%),
3. Bringing “beneficiary”
planned (17.6%), “advisor
strategic and/or member
actions to a of an advisory
good end. committee” (8.5%),
(Continued)
Measure
4. Keeping vision “representative of

and mission up another and/or
to date. partner organization
5. Creating in the field” (8.5%),
efficient “customer” (7.7%),
output from “representative
limited means of an umbrella
available. organization or
6. Enforcing federation” (7.7%),
changes to our and “funder,
society. sponsor, and/or
7. Realization donor” (2.8%).
of services to
beneficiaries.
Mitchell Transnational United Reputation for Recognition This was an interview Negative NGOs with leaders who
(2015) Non- States organizational from NGO study of 152 leaders binomial value the following factors
Governance effectiveness managers. of transnational regression have a better reputation for
Organization Leaders made NGOs registered effectiveness:
(NGO) 484 references in the United States —Similarity (similarity to
to 298 representing all one’s own organization or
particularly major sectors of philosophy, similarity in
effective NGO activities. vision or approach, common
NGOs. qualities) (p < 0.10).
—Grassroots approach
(engagement with
beneficiaries at the local
level, local capabilities,
bottom-up approach,
mobilization) (p < 0.10).
—Diversity of strategies
(multiple types of programs,
multipronged approach) (p
< 0.05).
—Dedication (passion and
intensity, commitment,
aggressive, serious, fearless)
(p < 0.05).
—Professional (collegial,
integrity, dependable,
trustworthy, reliable,
transparent, attention to
detail) (p < 0.01).
—Organizational structure
(type of organizational
structure, such as unitary,
federation, coalition)
(p < 0.05).
Contrary NGOs with
leaders who value the
implementation of sound
principles or strategy
(programs exemplify good
underlying vision, principles,
strategy) have a lower
reputation for effectiveness.
74 de Quevedo-Puente and Pérez-Cornejo
for something,’ which is sometimes referred to as reputation effectiveness
in the NPO literature, and ‘generalized favorability,’ generally named as
NPO reputation.
Whereas most of the NPO reputation measures based on the general
ized favorability conceptualization are inspired by the corporate reputa
tion literature (e.g., Bennett & Gabriel, 2003; Meijer, 2009; Sarstedt &
Schloderer, 2010; Schloderer, Sarstedt, & Ringle, 2014), the reputa
tion effectiveness measures (Mitchell, 2015; Padanyi & Gainer, 2003;
Sargeant, West, & Ford, 2001; Smith & Shen, 1996; Willems et al.,
2016) have emerged in the NPO literature. This later approach arises
from the importance of goal achievement for NPOs to get volunteers and
funding support (Heller, 2008). Due to the relevance of goal effectiveness
for consolidating NPO reputation, high-quality NPOs find themselves
in a reputation trap (Gent, Crescenzi, Menninga, & Reid, 2015). That
is, looking for support, NPOs have an incentive to focus their efforts
on achieving immediate targets that are easily attributable to them as
organizations and foster their reputation for effectiveness. This incentive
can lead some NPOs to myopic short-term behavior.
Both conceptualization approaches—namely, being known for
something/reputation effectiveness or generalized favorability/NPO
reputation—have been translated into a heterogeneous range of reputa
tion measurements with wide differences in the number of items, rater
profiles, and even the items. Reputation effectiveness approach has been
translated into either multi-item (Padanyi & Gainer, 2003; Sargeant
et al., 2001; Willems et al., 2016) or mono-item measures (Mitchell,
2015; Shier & Handy, 2012; Smith & Shen, 1996). Indeed, prior research
using mono-item reputation effectiveness measures generally has been
based on peer nominations by leaders of other responding NPOs (Mitch
ell, 2015; Smith & Shen, 1996). The second approach (i.e., NPO rep
utation) has been translated into multi-item measures (e.g., Bennett &
Gabriel, 2003; Meijer, 2009; Sarstedt & Schloderer, 2010; Schloderer
et al., 2014). In terms of rater profiles, studies have used NPO manag
ers’ opinions (Mitchell, 2015; Padanyi & Gainer, 2003; Smith & Shen,
1996), donors’ perceptions (Meijer, 2009; Sargeant et al., 2001), volun
teers’ valuations (Smith & Shen, 1996), and general public assessments
(Bennett & Gabriel, 2003; Michel & Rieunier, 2012), and others have
taken a multi-stakeholder approach (Willems et al., 2016). Tables 6.1
and 6.2 provide an overview of these differences and also of the hetero
geneous items used in the NPO reputation literature.
Effects of NPO Reputation

Previous research, although still scarce, has shown the positive influ
ence of NPO reputation in attracting resources (e.g., Bennett & Gabriel,
2003; Meijer, 2009; Padanyi & Gainer, 2003; Schloderer et al., 2014).
Specifically, previous research has found a positive relationship between
a strong NPO reputation and 1) individuals’ willingness to donate money
to NPOs (Schloderer et al., 2014); 2) effective donor attraction (Mei
jer, 2009); and 3) amount of money donated (Bennett & Gabriel, 2003;
Meijer, 2009). Also, Shier and Handy (2012) found support for these
relationships in the online context. Beyond attracting financial support,
positive NPO reputation increases individuals’ willingness to voluntarily
donate time and work (Schloderer et al., 2014). Although most empiri
cal research in this area supports these positive relationships, the results
are not unanimous. Indeed, Sargeant et al. (2001) did not find a signifi
cant relationship between NPO reputation and the amount individuals
donated. Table 6.1 presents the main results obtained by prior empirical
research on this topic.
This positive link between NPO reputation and resource attraction also
has been demonstrated in relation to different NPOs crises as a decreased
reputation can eventually lead to a drop in financial support. For exam
ple, the publicity surrounding the misuse of funds by the American Red
Cross following the September 11, 2001, terrorist attacks had a negative
impact on the fundraising ability of Red Cross societies around the world
(Laidler-Kylander et al., 2007). Similarly, when the president of United
Way of America was accused of using charitable donations to finance
his lavish lifestyle (Gibelman & Gelman, 2003; Shepard & Miller, 1994;
Simross, 1992), charitable contributions to it and affiliates of the organi
zation dropped dramatically.
Another scandal in 2001 after a critical report about Foster Parents’
activities in Haiti led approximately 11,000 donors to cancel their mem
berships and forced the organization to change its name to Plan Neder
land (“Foster Parents,” 2001; Meijer, 2009). A recently exposed example
is the Oxfam sexual scandal after the 2010 Haiti earthquake that has
depleted the organization’s funds and has diminished public, govern
ment, and donor confidence in Oxfam (Hopkins, 2018).
For-Profit and Nonprofit Alliances

Another increasingly common source of funding for NPOs is collabora
tions with companies. Indeed, the number of interactions between busi
nesses and NPOs related to corporate social responsibility (CSR) has
increased exponentially in the recent decades. During this period, the
nature of these interactions has also changed from being overly confron
tational to more collaborative or to a combination of the two (Argenti,
2004; Heap, 2000). These interactions have increased because firms and
NPOs possess complementary resources (Austin, 2000; Das & Teng,
1998), and these partnerships have potential mutual benefits. Whereas
NPOs’ main resources lie in their reputation and legitimacy within soci
ety (Argenti, 2004; Austin, 2000; Lucea, 2010), trust in companies has
spiraled downward in the last decades (Argenti, 2004). On the other
hand, corporations have human and financial resources (Austin, 1998;
Berger, Cunningham, & Drumwright, 2004; Brown & Kalegaonkar,
2002; Elkington & Beloe, 2010), which have been in decline for NPOs.
In fact, prior research has found a strong correlation between NPOs’
annual budgets and the number of ties they have to corporations (Hoff
man & Bertels, 2010). Collaborating with NPOs enables firms to dem
onstrate their awareness of and concern for social or environmental
protection issues (Parker & Selsky, 2004; Selsky & Parker, 2005) as well
as acquire ecological, scientific, and legal NPO expertise to improve their
products and business models related to environmental or social issues
(Hartman & Stafford, 1997; Milne, Iyer, & Gooding-Williams, 1996).
Meanwhile, NPOs obtain higher budgets and influence on business ways
of doing to further their missions (Graf & Rothlauf, 2012).
Most of these partnerships have emerged because NPOs pressure has
provoked firms’ reputational risk, and companies have engaged NPOs
in their CSR efforts as a solution to reduce this reputational risk (Heap,
2000). Indeed, some of these alliances have emerged during company cri
ses to avert or repair damage to companies’ reputations (van Huijstee &
Glasbergen, 2008). Beyond risk management, some collaborations are a
way to initiate a dialogue with stakeholders or even a means to pursue a
competitive advantage. In these cases, the relationship between compa
nies and NPOs has evolved from seeing each other as threats to cooperat
ing for mutual gain (Marcuello Servos & Marcuello, 2007).
These alliances have important implications not only for corporations
but also for NPO partners (Graf & Rothlauf, 2012; Heller, 2008). Both
bear the risk that their partner will behave in a scandalous manner, sul
lying (by association) the reputation of the innocent partner (Wymer &
Samu, 2008). However, this potential risk is even greater for NPO part
ners than for business partners because NPOs’ ability to raise funds from
private donors may be greatly reduced as a result of damage to their
reputation (Wymer & Samu, 2008). Indeed, Heller (2008) found that
individuals’ willingness to donate to NPOs with a positive reputation
dramatically declines when their partners have a negative reputation.
Therefore, NPOs need to pay close attention to alliance management
because partner firms’ negative behavior can have a detrimental effect on
NPOs’ reputation (Graf & Rothlauf, 2012).
Antecedents and Management of NPO Reputation

The positive impacts of reputation have led to a growing interest in
the antecedents and management of NPO reputation to understand
what factors favor its consolidation. Among this scarce literature (see
Table 6.2), a few studies have found support for the important role of
nonprofit governance (Padanyi & Gainer, 2003; Smith & Shen, 1996;
Radbourne, 2003) in NPO reputation. Indeed, based on managers’ opin
ions, Radbourne (2003) proposed a model that suggests good govern
ance fosters effectiveness and strategic development, which in turn lead
to enhanced NPO reputation. Along with this sparse evidence, there is
a growing literature arguing that NPO accountability fosters reputation
(Ebrahim, 2003; Tremblay-Boire, Prakash, & Gugerty, 2016; Willems,
Waldner, Dere, Matsuo, & Högy, 2017). Many NPO stakeholders have
a reduced capacity to observe these organizations’ operations (Tremblay-
Boire et al., 2016), so reporting balances informational asymmetries
(Hyndman & McConville, 2016; Tremblay-Boire & Prakash, 2015)
and reduces managerial discretion (De la Fuente Sabaté & De Quevedo
Puente, 2003; Owen, Swift, Humphrey, & Bowerman, 2000; Sierra-
García, Zorio-Grima, & García-Benau, 2015), consequently enhancing
NPO credibility. Therefore, being accountable favors the consolidation
and preservation of NPO reputation and contributes to the overall repu
tation of the NPO sector. In this sense, consultancy firms recommend
adapting good governance business practices to the specific characteris
tics of the NPO context to strengthen stakeholders’ trust and therefore
NPO reputation (PricewaterhouseCoopers, 2018).
Furthermore, previous research has identified heterogeneous factors
that have an impact on NPO reputation. For example, Sarstedt and Schlo
derer (2010) and Schloderer et al. (2014) identified attractiveness, organ
izational social responsibility (OSR), quality, and performance as factors
influencing NPO reputation. Padanyi and Gainer (2003) also showed
that client satisfaction and NPOs’ ability to partner with other NPOs
positively affects peer reputation. Widening the approach to include
all stakeholders, Willems et al. (2016) showed that an NPO’s relation
ship with its stakeholders affects its reputation effectiveness. Similarly,
Mitchell (2015) showed that NPOs’ leadership values are relevant for
reputation effectiveness. Moreover, previous research has also revealed
that organizational size (Mitchell, 2015), and some aspects related to
the nature of NPOs, such as having an advocacy or service function or
having public beneficiaries/users, among others (Mitchell, 2015; Smith &
Shen, 1996), affect reputation effectiveness.
Conclusions
From this previous literature, we can conclude that NPO reputation
is a key asset to attract resources either from donors and governments
or through company collaborations. These resources make it easier
for NPO to achieve their goals (Smith & Shen, 1996), which enhances
NPOs’ credibility and reputation (Lefroy & Tsarenko, 2013; Milne et al.,
1996) and in turn improves their ability to attract donations, volunteers,
and partnerships (Deephouse & Carter, 2005). So, these resources make
NPOs more effective and enhance their reputation, generating an upward
spiral that makes reputation a very valuable asset for NPOs. Thus, the
underlying managerial implication for NPO leaders is to build and pre
serve their reputation.
Research arguments, some auditors’ opinions, and the results of
this budding empirical research suggest that governance mechanisms,
accountability, and stakeholder involvement in decision processes
may foster NPO reputation. All these tools reduce information asym
metries between NPO stakeholders and favor the consolidation of NPO
reputation.
Due to the diverse nature of NPOs, the scarce empirical research on
NPO reputation, and the heterogeneous methodological approaches
used in this research, future efforts exploring the antecedents and con
sequences of NPO reputation are welcome and are likely to help NPO
practitioners manage this valuable resource.
Note
1. More information available at http://fortune.com/worlds-most-admired
companies/; www.reputationinstitute.com/solutions; www.merco.info/es/.
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7 Crowding-Out or
Crowding-In
The Dynamics of Different
Revenue Streams
Arjen de Wit, René Bekkers,
and Pamala Wiepking
Introduction
In public economics, a large body of literature has examined the ques
tion whether government funding ‘crowds out’ private donations.
There has been a vast number of empirical studies on this question,
with dispersed and even contrasting findings. In this chapter we 1)
give an overview of the most important theoretical perspectives on the
relationship between government support and philanthropic giving; 2)
evaluate the available evidence on these perspectives; and 3) identify
the most promising directions for future research, taking into account
the importance of the dynamics of funding portfolios and the contex
tual differences that influence these dynamics. We argue that it is not
very useful to estimate ‘the’ crowding-out effect, because the associa
tion between government support and private giving varies strongly
between contexts.
A better understanding of the dynamics of different revenue sources is
crucial for the future of nonprofit organizations (NPOs), given the impor
tance of resources for organizational performance (Pfeffer & Salancik,
1978). The size and composition of the revenue portfolio has important
consequences for the financial health and governance of NPOs. Resources
are necessary for NPOs to deliver goods and services that cannot be pro
vided by the state or the market, to form a space where citizens express
themselves, and to defend minority and animal rights in public debates.
As such, the nonprofit sector plays a crucial role in today’s diverse socie
ties. To increase organizational effectiveness of NPOs it is important to
know, for both funders and recipients, how different revenue streams
interact within different local contexts.
In the next section, we first discuss the theoretical foundations of the
literature studying the association between government support and pri
vate donations, and the possible explanations for the mixed empirical
support for the theoretical claims.
84 de Wit, Bekkers, and Wiepking
Theoretical Perspectives
Micro-Economic Perspective
Theory: a vast literature in economics examines how changes in gov
ernment funding affect private individual donations. Economic theory
predicts that altruistic donors reduce donations by $1 for each $1 con
tributed through tax-funded government subsidies (Roberts, 1984; Stein
berg, 1991; Warr, 1982). Because the crowd-out was found to be less
than dollar-for-dollar, this theory was later refined by the addition of
a ‘warm glow’ component to the donors’ utility function, representing
all motives that are not responsive to changing mandatory contributions
(Andreoni, 1989, 1990).
Key actors: individual private donors.
Empirical evidence: experimental designs testing predictions of micro
economic theory typically provide participants with a small endowment
that they can divide between themselves and the public good. When there
is a larger mandatory contribution (‘tax’) to the public good, participants
generally give lower amounts as a voluntary donation. Such designs on
average find that a $1 increase in mandatory contributions corresponds
with a $0.64 decrease in voluntary contributions—this is fairly robust,
with a 95% confidence interval around this average between -0.70 and
-0.58 (De Wit & Bekkers, 2017). These results show that even in tightly
controlled laboratory circumstances philanthropic donations cannot
completely be substituted by a government tax or vice versa.
Two limitations of the micro-economic theory are the following. First,
the theory and laboratory experiments testing it imply a number of
assumptions, including full information on the actions of ‘the govern
ment.’ These assumptions are not likely to be true in real life because
donors know very little about the level of government funding NPOs
receive (De Wit, Bekkers, & Broese van Groenou, 2017; Eckel, Gross
man, & Johnston, 2005; Horne, Johnson, & Van Slyke, 2005). Second,
the theory uses the term ‘warm glow’ as a catch-all phrase to refer to all
impure altruistic motives, but it is unsure what motivations or mechanisms
are included here. Giving for reasons of reputation or psychological ben
efits are just a few of the possible mechanisms that make donations unre
sponsive to government support. Donors may be insensitive to changes
in government funding because of a habit, because giving sends a costly
signal to potential partners, because giving is a social norm that implies a
duty, or because not giving would create guilt (Vesterlund, 2006).
Evaluation: in laboratory experiments there is strong evidence for
impure altruism, but the external validity of such experiments is uncer
tain. This theoretical perspective does little to explain why donations
would not be responsive to changes in government funding.
Crowding-Out or Crowding-In 85
Institutional-Political Perspective
Theory: Weisbrod’s (1977) government failure theory posits that the gov
ernment, whereas aiming to provide public goods that the market is not
able to produce, is not equipped to fulfill all needs in society. Democratic
governments are bound to the desires of the median voter, which leaves
demands from different minorities unfulfilled. This is where NPOs step
in, with their ability to provide a wide variety of public goods. Thus,
where societies are more heterogeneous, government failure theory
would predict a larger nonprofit sector and a smaller government.
Salamon and Anheier (1998) argue that the government failure theory
is not sufficient to explain the mechanisms that are at work in differ
ent national contexts. Their social origins theory posits that social and
political developments in the history of specific countries define current
civil society sector dimensions: traditional, liberal, welfare-partnership,
social-democratic, and statist. These dimensions reflect different power
relationships between state, market, and nonprofit sector in each country
(Salamon, Sokolowski, & Haddock, 2017).
Key actors: NPOs, political parties, trade unions, and lobby groups.
Empirical evidence: analyses with data aggregated on the country,
state, or county level show mixed evidence for government failure theory.
Some studies find a negative correlation between government expendi
tures and the size of the nonprofit sector, as predicted by government fail
ure theory (Matsunaga & Yamauchi, 2004; Matsunaga, Yamauchi, &
Okuyama, 2010); other studies find positive correlations (Paarlberg
& Zuhlke, 2019); and some studies find zero correlation (Grønbjerg &
Paarlberg, 2001).
The social origins theory as put forward by Salamon and Anheier has
been widely cited but not often empirically scrutinized. Correlational
analyses with aggregated data show to some extent support for the theo
retical predictions based on the social origins theory (Einolf, 2015; Sala
mon et al., 2017), but the longitudinal comparative data needed to test
this theory do not exist.
Two limitations of the institutional-political perspective are the fol
lowing. First, the theoretical arguments are not universally applicable.
Government failure theory requires a government that responds to the
median voter and is thus most likely to occur in majority democracies
(Sokolowski, 2013). Likewise, many countries do not fit in the five ideal
types proposed in social origins theory. Einolf (2015, p. 518) concludes
that “[e]ven for wealthy, democratic countries with a European culture
and history, Salamon and Anheier’s social origins theory is of limited use.”
Second, there is a lack of reliable quantitative data to test the hypoth
eses of these theories. Government failure theory is typically tested with
proxy measures of heterogeneity, like ethnic or socio-economic diversity,
which do not measure voter demands directly. Heterogeneity is not only
a demand-side variable, but also related with social cohesion and other
factors on the supply side (Corbin, 1999). Measures of philanthropy are
problematic, too. Despite very useful attempts to collect all informa
tion that is currently available (Salamon & Anheier, 1998; Wiepking &
Handy, 2015), there is a lack of reliable cross-national data on philan
thropic giving, which makes comparative research problematic.
Evaluation: inconclusive. Historical political processes certainly con
tribute to the development of the nonprofit sector vis-à-vis the state, but
the current data do not allow for strong conclusions about specific theo
retical predictions. The strongest contribution of this perspective lies in
the extensive analysis of country-specific political processes, rather than
in quantitative testing of the theoretical expectations.
Institutional Signaling Perspective

Theory: institutional theories assume that attitudes and behaviors of
citizens are shaped by formal (rules, legislation, organization) and infor
mal (norms, habits) institutions (North, 1991; Rothstein, 1998). When
in search for cues to guide their choices, people are guided by social
rules (Ingram & Clay, 2000). Government support may serve as a sig
nal that NPOs are trustworthy, which could explain a positive associa
tion between government funding and philanthropic donations (Handy,
2000; Heutel, 2014; Schiff, 1990).
Key actors: individual private donors.
Empirical evidence: theories on institutional signaling are typically
tested with cross-national data, often finding positive correlations
between government expenditure and civic engagement (Van Oors
chot & Arts, 2005). For monetary giving, there is evidence that extensive
social welfare spending does not reduce the total size of philanthropy,
but rather affects the distribution over different causes, such that donors
give more to ‘expressive’ organizations (De Wit, Neumayr, Handy, &
Wiepking, 2018; Pennerstorfer & Neumayr, 2017; Sokolowski, 2013).
Studies may also use more fine-grained datasets on specific charities.
Heutel (2014) finds more strongly positive correlations between govern
ment funding and philanthropic donations among younger charities, for
which the signaling effect would be stronger because they are less well-
known among the public.
A first limitation is the availability of data. Similar to the institutional-
political perspective, research in the signaling literature mainly examines
cross-national variety, because the largest differences between institu
tional arrangements are between countries. Yet, these studies are limited
by the available cross-country datasets, which primarily cover WEIRD
(Western, Educated, Industrialized, Rich, and Democratic) countries.
A second limitation in this perspective is the issue of causality. Wel
fare state institutions not only guide behavior through norms and sig
nals, but also redistribute resources that encourage philanthropic giving
(Stadelmann-Steffen, 2011; Van Ingen & Van der Meer, 2011). Further
more, individual values, government expenditures, and civic engagement
can all be driven by the same underlying variables, and it is problematic
to treat government spending as an exogenous variable (Payne, 2009).
Insights from the institutional-political perspective can be helpful in this
sense, which pays more attention to the political processes that lead to
the establishment of institutional arrangements in the public and non
profit spheres.
Evaluation: inconclusive. There are large differences between countries
in terms of institutional arrangements and levels of philanthropy, but the
causal mechanisms are difficult to disentangle.
Organizational Perspective
Theory: resource dependency theory (Pfeffer & Salancik, 1978) assumes
that funders exercise control over NPOs. NPOs can reduce their depend
ence by attracting resources from additional funders. Because efforts to
do so require investment of resources, a self-sustaining feedback loop
emerges that reduces the chances of survival for organizations in a down
ward spiral and makes winners even more successful. Such a ‘Matthew
Effect’ was described by Merton (1968) for careers of scientists—one
grant leads to another.
Other scholars argued for an opposite effect, in which organizational
behavior would explain a negative association between government sup
port and private donations. As described in the ‘nonprofit starvation
cycle’ (Gregory & Howard, 2009), funders require low overhead costs,
which gives pressure on NPOs to present themselves in that way, whereas
performing with mediocre infrastructure. This leads again to unrealistic
expectations of funders, and the cycle starts over again. In this argument,
receiving government support could be detrimental for fundraising and
administration expenditures that are necessary to obtain private income,
because organizations are pressured to cut back on their indirect costs.
Andreoni and Payne (2003) argue that NPOs that receive lower gov
ernment funding will invest more in fundraising behavior. Fundraising
becomes less efficient, however, when individual giving is indeed crowded
out by government support: if individual giving is lower, it is more costly
to acquire funds. The result is incomplete crowding-out. This process has
been labeled ‘indirect crowding-out.’
Key actors: fundraising organizations.
Empirical evidence: Andreoni and Payne (2003, 2011a, 2011b) find
that charities in the United States and Canada increase fundraising efforts
when confronted with lower government support. In Germany, however,
Schubert and Boenigk (2019) show that declines of government funding
start a ‘starvation cycle’ in which organizations have increasing difficul
ties to acquire income.
In terms of limitations, there are relatively few reliable data on organ
izational revenues in many countries, and more analyses can reveal how
these mechanisms work in different national contexts and among dif
ferent types of organizations. Another limitation might be that financial
indicators are not always proper indicators of the proposed theoretical
constructs, and there is ample room for discussion about the best way
to measure constructs like liquidity, financial health, and revenue diver
sification (e.g., Chikoto-Schultz, Ling, & Neely, 2016; Prentice, 2016).
Also, analyses on financial statistics usually do not provide insights in
decision-making processes within organizations. Research has exam
ined the relationships between different types of revenue streams and
NPOs’ mission, autonomy, and degree of formalization (Froelich, 1999;
O’Regan & Oster, 2002; Seo, 2016; Verschuere & De Corte, 2014).
Because revenue portfolios are also driven by organizational charac
teristics and choices made by the receiving organizations, however,
these relationships do not necessarily imply causal influences (Fischer,
Wilsker, & Young, 2011).
Evaluation: organizational behavior is important for the association
between government support and philanthropic giving. It is uncertain
to what extent the proposed mechanisms work differently in different
contexts and for different types of organizations.
Towards a Dynamic Approach

To some extent, the divergence of findings in the empirical literature can
be attributed to differences in the data and methods used. Whereas it is
clear that different research designs lead to different findings (Lu, 2016;
De Wit & Bekkers, 2017), there is no consensus about the internal and
external validity of such choices. In addition, there are substantial reasons
why studies have reached such different conclusions. It has been argued
that crowding-out effects vary with the level of government support (Bor
gonovi, 2006; Brooks, 2000, 2003), the salience of the tax (Eckel et al.,
2005), the number of other donors (Ribar & Wilhelm, 2002), differences
between types and costs of public goods (Tinkelman, 2010), the number
of people who do or do not contribute to a public good (Chan, God
byb, Mestelman, & Muller, 2002; Ribar & Wilhelm, 2002; Tinkelman,
2010), and the availability of information (De Wit et al., 2017). Some
of these contextual differences may explain differences in the findings
from between research designs as well. Laboratory experiments typically
have a small number of other donors (Ribar & Wilhelm, 2002) and a
salient message about the government contribution that is ‘taxed’ from
the participants (Eckel et al., 2005). These conditions create a stronger
crowding-out effect. In a large economy of donors, imperfect informa
tion about government support is likely to reduce the effect of changes in
government funding on private giving.
Different choices in data and methods, however, do not fully explain
why crowding-out effects look very different from the four perspectives.
The four perspectives we have discussed also identify different actors
as pivotal in the relationship between government funding and private
giving. The four perspectives are not mutually exclusive. In reality, all
actors involved probably all have their influences. These influences vary
considerably between contexts—i.e., between ‘types,’ cultures, countries,
regions, and over time. Therefore, we argue it is not very useful to try to
estimate ‘the’ crowding-out effect. Different funding sources do not oper
ate in a vacuum but are in constant interaction with other actors within
and around the beneficiary organization. Therefore, theory and research
on NPO revenues will benefit from adopting a dynamic approach. Below
we discuss two broad factors to consider in future research: interactions
between different revenue streams, and the context in which these fund
ing streams interact.
The Influence of Other Revenue Streams

A first reason why the effects of changes in government funding vary
so strongly is that they interact with changes in other revenue streams.
Compared to the sizeable literature on the effects of government funding
on private donations, research on the interaction between funding from
other sources, including households, foundations, businesses, and gov
ernments, is rare. It is uncertain how these funding sources are related,
and how these interactions affect outcomes such as organizational effec
tiveness. This is surprising, because different actors all contribute to the
same goals and it is likely that they influence each other.
On the one hand, revenues can substitute each other. From the
institutional-political perspective we learn that country-specific politi
cal processes lead to a certain division of labor between the state and
the nonprofit sector. Non-governmental actors may step in where gov
ernments are not able to fulfill all demands, and this argument may be
applicable to all types of private actors that contribute to those needs.
Households, foundations, and businesses may fill the gaps of the gov
ernment and give money to organizations with lower levels of public
funding. Philanthropic foundations are a special case because they are
tax-exempt in many countries. Whereas households and businesses may
perceive government subsidies as something that they pay for with their
taxes, foundations provide grants that are often completely independent
from government subsidies. If there is substitution, it would be because
other funding sources reduce the social needs in society.
The government in its turn may decide to decrease subsidies to
organizations that receive high levels of private funding. Previous stud
ies showed that private giving crowds out government subsidies in U.S.
higher education (Becker & Lindsay, 1994; Sav, 2012), because increas
ing private donations affords politicians and bureaucrats “opportunities
for reallocating tax supplied dollars away from education to other self-
promoting and vote gathering pursuits” (Sav, 2012, p. 1133).
Individual philanthropic donors may not only respond to levels of
government support, but also to other types of funding. The theoretical
rationale is largely similar to economic theories on government support
and donations, with altruistic donors expected to reduce their contribu
tions in the presence of other funding sources. Experimental evidence
suggests that business funding crowds out individual donations (Bennett,
Kim, & Loken, 2013). There is some literature on the idea that charitable
lottery players donate less to philanthropic organizations, although evi
dence suggests that charitable gambling and donations are complements
rather than substitutes (Apinunmahakul & Devlin, 2004; Lin & Wu,
2007). It is likely that individual responses depend on how donors per
ceive the other funder. Business funding may be perceived as a signal of
undesired corporate influences on NPOs strategies, crowding-out private
donations, whereas income from foundations or governments may be
evaluated more positively, crowding-in donations (Khovrenkov, 2019).
Organizational behavior may partly explain substitution effects
between revenue streams. Insights from the organizational perspective
are useful not only for the association between government support
and private donations, but also for interactions between other types of
funding.
On the other hand, revenues may complement each other. Governments
often work together with NPOs, businesses, and foundations in public-
private partnerships (Ansell & Gash, 2008). In such collaborations, it is
common that all partners contribute knowledge and/or resources. With
different types of contracts, including Social Impact Bonds, the initiators
ensure the (conditional or unconditional) engagement of multiple public
and private funders. For receiving organizations, this automatically leads
to a diverse portfolio. This can be helpful to NPOs in achieving its mis
sion, although there are also some cautions for working with complex
partnerships and having strong revenue diversification, largely dependent
on the type of NPO (Hung & Hager, 2019).
Besides such organizational collaborations, it could be that funding
streams complement each other in a less visible way. From the literature
on institutional signaling we learn that funding from other sources can
serve as a norm to direct individual behavior. This may not only hold for
individual donors but also for businesses and foundations, who are look
ing for cues to guide their own financial decisions. Even policy makers,
who are supposed to make robust decisions based on voter preferences,
may have a bias towards organizations that are already successful in
attracting funds.
The behaviors of the recipient organizations themselves may also pro
duce positive correlations between revenue streams. Large and success
ful organizations may be better able to hire professional fundraisers and
establish and maintain connections with funders.
The Context in Which NPOs Operate

Besides interactions between different revenue streams, the context in
which NPOs operate defines how government funding may affect philan
thropic donations. Three factors are briefly mentioned here and are more
extensively discussed in De Wit (2018).
First, institutional arrangements on the macro level may affect the
dynamics between different revenue streams. An important hypothesis
which is not sufficiently tested is that crowding-out is most likely in the
U.S. and other Anglo-Saxon countries. These countries are characterized
by a highly professionalized fundraising regime (Wiepking & Handy,
2015) and a more critical attitude towards government interventions
(Andreß & Heien, 2001; Svallfors, 1997). More cross-national research
in the realm of the institutional-political and institutional signaling per
spective could examine how dynamics between NPOs revenues vary
across macro contexts.
Second, dynamics between NPOs revenues may depend on the sub-
sectors of the nonprofit sector. A meta-analysis finds stronger negative
correlations between government funding and charitable giving among
human service NPOs, whereas it finds stronger positive correlations for
the arts and health care sectors (Lu, 2016). Theoretical arguments about
why such effects would vary across the nonprofit sector are scarce. Each
subsector is unique in the types of public goods that are produced, the
actors that are most prominent, and the type of NPOs that are active
in that area. Furthermore, those subsectors are not isolated: it has been
argued that changing social needs do not decrease total donations, but
rather lead donors to shift their donations towards other subsectors (De
Wit et al., 2018; Pennerstorfer & Neumayr, 2017; Sokolowski, 2013).
Research on the organizational level should consider such contextual
dynamics when making generalizable statements about the association
between government funding, philanthropic donations, and other rev
enue streams.
The third contextual factor is the availability and framing of infor
mation. Whereas behavioral experiments often aim to make predictions
about macro effects, they generally fail to take the availability of informa
tion into account. Citizens adapt their giving behavior only when they are
aware of external changes like changing government support. Although
this sounds like ‘stating the obvious,’ there has been surprisingly little
academic attention for the availability of information among prospective
donors (notable exceptions are De Wit et al., 2017; Horne et al., 2005;
Li & McDougle, 2017; McDougle & Handy, 2014). More experimental
and non-experimental data on citizen perceptions and NPO communica
tion could shed light on the role of information in donor decisions.
Concluding Remarks
In this chapter, we discussed the arguments, key actors, and empirical
evidence of four prominent theoretical perspectives on the relationship
between government financial support and private individual giving. The
micro-economic perspective convincingly revealed that individual donors
are impure altruists in laboratory experiments, but it is uncertain to what
extent this behavior occurs in daily situations. The institutional-political
perspective contributed important insights in how interest groups con
tribute to constellations of public and nonprofit institutions, and the
institutional signaling perspective makes strong arguments about how
institutions guide individual donor behavior. However, both institutional
perspectives are not backed up with strong causal evidence. The organi
zational perspective, finally, delivers strong theoretical and empirical
arguments on organizational behavior as a cause and a consequence of
changing revenues, although the proposed mechanisms will likely work
differently in different contexts.
The theoretical discussion leads us to propose a dynamic approach
towards NPO revenues. Supposed effects of government support on pri
vate donations do not occur in a vacuum but are shaped by contextual
factors like the institutional environment, the organizational structure,
the political context, and the media landscape. Philanthropic founda
tions, individual donors, government bodies, and corporate enterprises
may all contribute to public goods, and they all interact with each other.
Future research should go beyond estimations of ‘the’ crowding-out
effect and pay more attention to the ecosystem in which such interactions
take place. Such insights will help funders to better evaluate the value and
consequences of their contributions, thus helping the nonprofit sector to
continue contributing to essential public goods.
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Part II
Revenues, Funding, and

Financial Health
8 Revenue Diversification,
Growth, and Stability
Grace L. Chikoto-Schultz and Narttana
Sakolvittayanon
Introduction
In order to survive, all organizations must acquire and maintain the
resources they need (Pfeffer & Salancik, 2003). In the case of nonprofit
organizations (NPOs), the general recommendation has been to adopt a
revenue diversification strategy, as part of their revenue-seeking behavior.
Financial crises have demonstratively shown the uncertainty and insta
bility of the economic environment and the resultant grave impacts on
many NPOs. For example, in discussing the effects of the weak 2008
U.S. economy on NPOs, Chris Abele, then-president of the Argosy Foun
dation, believed that many NPOs would not survive the economic con
ditions (Schuyler, 2008). His prediction was confirmed by the closure
of a large arts group, the Milwaukee Shakespeare (Milwaukee Shake),
because its principal funder, the Argosy Foundation, was unable to honor
its grant commitment of $925,000 of Milwaukee Shake’s total $1.3 mil
lion expected budget for the 2008–2009 season (Milwaukee Journal
Sentinel, 2008). Three observations can be made from this case: first,
the Milwaukee Shake’s financial position was characterized by a serious
case of resource dependence, in this case extreme revenue concentration.
About 90% of the NPO’s revenue came from just one source. Second,
NPOs need to ensure they have sufficient funds to be able to achieve their
missions in the short term. And three, NPOs need to adopt measures
and strategies that enhance their ability to withstand external crises and
shocks that threaten their financial stability.
A revenue diversification strategy is meant to mitigate against such
environmental conditions of uncertainty and scarcity by relying on
diverse sources of income and providing more financial cushion for the
organization. Revenue diversification is generally cited as a key strat
egy for achieving financial stability (Carroll & Stater, 2009; Chang &
Tuckman, 1994; Froelich, 1999; Kim, 2017), effectively lowering the
risk of financial crisis and improving the odds of organizational sur
vival (Altman, 1968; Gilbert, Menon, & Schwartz, 1990; Ohlson,
1980). However, a revenue concentration strategy, which relies on
100 Chikoto-Schultz and Sakolvittayanon
fewer revenue streams, is not without its merits. Others have found
empirical evidence in support of revenue concentration as a strategy for
enhanced efficiency (Frumkin & Keating, 2011), and increased financial
growth or capacity (Chikoto & Neely, 2014; Lin & Wang, 2016; von
Schnurbein & Fritz, 2017).
However, a recent meta-analysis of revenue diversification research
found “a small, positive, yet statistically significant association between
revenue diversification and nonprofit financial health” (Hung & Hager,
2019, p. 5). The authors concluded that the overall “effect is small, with
negative and null effects largely counter-balancing the positive assess
ment” of revenue diversification on financial health (Hung & Hager,
2019, p. 21). This same meta-analysis also found that whether financial
health was measured as “static capacity or dynamic sustainability meas
ures” (Hung & Hager, 2019, p. 22), as observed by Prentice (2016), it
did not influence the effect of revenue diversification. What did matter
was whether revenue diversification was measured as granular or aggre
gated, as this distinction affected the financial health effects as observed
in Chikoto, Ling, and Neely’s (2016) study.
Lest we ‘toss out the baby with the bath water,’ it is still worth con
sidering the richness of the collection of revenue diversification research
and its contributions to the overall nonprofit finance debate. Each contri
bution still draws attention to a particular dimension of the complexity
of the revenue diversification strategy and the many factors that should
or could influence an organization’s decision to diversify or concentrate.
With these considerations in mind, this chapter addresses the definition
of revenue diversification, how revenue diversification has been meas
ured in the nonprofit field, some of the theoretical frameworks that have
influenced its application and the respective effects on financial health,
and some of its drivers as identified in select studies. In response to the
question of whether revenue diversification is always positive, this chap
ter concludes that it depends on each NPO’s mission and the services that
flow from it, the strategic alignment of a revenue diversification strategy
to that mission, and other factors that may be unique to each NPO and
its environment.
Revenue Diversification and How It Is Measured

NPOs’ activities can be financed through multiple funding streams, rang
ing from government grants, contracts for services, the sale of goods
and services, in-kind donations of goods (e.g., food aid) and services
(e.g., volunteers), charitable giving from individuals and philanthropic
organizations, membership dues, and investment income or returns on
investments (Boris & Steuerle, 2006; Chang, Tuckman, & Chikoto-
Schultz, 2018; Young, 2007). The degree to which an NPO narrowly or
broadly relies on these funding streams is what is referred to as ‘revenue
Revenue Diversification, Growth, and Stability 101
concentration’ or ‘revenue diversification.’ The ability to attract multiple
funding sources is an opportunity unique to NPOs (compared to govern
ments and for-profit corporations), whereas, managing multiple stake
holders or funders can be a challenge.
Within the nonprofit sector, revenue diversity has been measured
through a revenue concentration index that is based on the Hirschman-
Herfindahl Index (HHI), which is traditionally used by economists to
measure market concentration (Chang & Tuckman, 1994). The index’s
roots can be traced to both Hirschman (1945, 1964) and Herfindahl
(1950), both of whom independently developed it as a measure of
“trade and industry concentration or inequality” (Chikoto et al., 2016,
p. 1427). Since its debut in the nonprofit literature through Tuckman
and Chang’s (1991) work, the HHI has been widely adopted (Chikoto
et al., 2016). When originally introduced into nonprofit research, rev
enue diversity was constructed as a revenue concentration index akin to
the HHI. The revenue concentration index (RCI) was therefore calcu
lated by summing the squared percentage share of each revenue stream,
or by summing the squared portions of each revenue stream and dividing
that by the square of total revenue (Tuckman & Chang, 1991; Chang &
Tuckman, 1994). As shown in the equation below, each revenue source
is denoted as i:
RCI = ' ( Revenue Sourcei / Total Revenue )

2
Calculating RCI in this way demonstrates several properties: first,

if total revenue came from a single source, RCI would be equal to ‘1,’
denoting revenue concentration (Chang & Tuckman, 1994); second, the
value of RCI would also drop, indicating more diversification, as the
proportion of each revenue source becomes more equally distributed;
finally, RCI is not dependent on organizational size. Therefore, an RCI
approaching ‘0’ would indicate that an organization’s revenue streams
are more diversified, whereas, an RCI equal to ‘1’ or approaching ‘1’
indicates more concentrated revenue streams. To obtain a measure of
revenue diversification (what we will refer to as the HHI), one would
have to subtract RCI from ‘1.’
HHI = 1 - I ( Revenue Sourcei / Total Revenue )

2
Note, however, that Chabotar (1989) had earlier discussed the idea
of diversified revenues to mitigate against a dependence on any single
source, measuring diversity using common-size ratios based on the rev
enue source as a proportion of total expenditures. To our knowledge, the
only other study that measured revenue diversification in ways other than
shown above is by Despard, Nafziger-Mayegun, Adjabeng, and Ansong
(2017), who measured diversification using a count of the number of
different revenue types and an ordinal variable based on the proportions
of funding from international sources, ranging from ‘0’ (no international
funding), to ‘2’ (receiving more than 50% from international sources).
Recently, researchers have more commonly used a modified HHI which
“considers the relative position of an NPO’s revenue structure [relative]
to its maximal diversification scenario” (Yan, Denison, & Butler, 2009,
p. 57), to measure revenue diversification, where n denotes the number
of revenue sources for a given NPO:
1 - L ( Revenue Sourcei / Total Revenue )
2
Modified HHI =
(1 - n ) / n
Sensitivity of the Measurement

Primarily as a function of the available data, or to maintain consistency
with prior research, studies have tended to calculate the HHI using vary
ing numbers of revenue streams. In other words, varying numbers of
revenue streams came from aggregated and disaggregated measures of
different revenue streams. For example, donative income can be con
sidered one revenue stream or it can be disaggregated into individual
donations, institutional donations, and government grants. Conse
quently, HHI calculations have ranged from three to 21 sources: dona
tive, earned, and investment income (Carroll & Stater, 2009; Frumkin &
Keating, 2002; Keating, Fischer, Gordon, & Greenlee, 2005); donative,
earned, investment income, and government grants (Yan et al., 2009);
five sources (Hager, 2001), 11 sources (Calabrese, 2011), 13 (Chikoto &
Neely, 2014), 19 (Wicker & Breuer, 2013), and 21 (Wicker, Longley, &
Breuer, 2015).
Whereas the number of revenue streams used in the calculation of the
HHI may seem innocuous, Chikoto et al. (2016) warned against infor
mation loss that occurs through aggregation, which “in turn affects the
estimation results” (p. 1439) in non-trivial ways. This finding has been
confirmed by Hung and Hager’s (2019) recent meta-analysis. There
fore, researchers should opt to use more disaggregated revenue streams,
whenever possible, to avoid information loss in the aggregation process
(Chikoto et al., 2016).
Revenue Diversification Perspectives and Their

Application
At least four rational behavior lenses are associated with the revenue
diversification strategy, namely, resource dependence theory, transac
tion costs theory, organizational institutionalism theory, and the modern
portfolio theory. These theoretical perspectives regard NPOs as objec
tive maximizers that “develop income portfolios that allow them to
maximize total outputs or resources that can be converted into outputs”
(Kearns, 2007, p. 297). First, resource dependence theory is premised on
the idea that organizations establish relationships with others in order
to obtain the resources they lack (Pfeffer & Salancik, 2003). This theory
explains NPOs’ funded relationships through the nature of the resource
exchange and power asymmetry associated with the exchange (Oliver,
1990; Pfeffer & Salancik, 2003). As such, an organization is “con
trolled by an external source to the extent [it depends] on that source
for a large proportion of inputs or outputs” (Pfeffer & Salancik, 2003,
p. 271), as observed in the Milwaukee Shake case. Because NPOs oper
ate in resource-scarce, highly competitive and therefore uncertain envi
ronments, choosing to diversify funding sources is expected to reduce
the uncertainty associated with a dependence on a single funding source
(Chang & Tuckman, 1994; Grønbjerg, 1993). Revenue diversification
becomes a combative strategy for loosening resource dependencies
(Pfeffer & Salancik, 2003).
Organizational institutionalism bases organizational success on the
degree to which an organization responds and adapts to changes in
its external environment. For an NPO, having diverse funding streams
establishes favorable linkages with the community due to buy-in, thus
enhancing organizational legitimacy and recognition (Bielefeld, 1992;
Galaskiewicz, 1990; Galaskiewicz & Bielefeld, 1998). This in turn leads
to additional support from the community (Kearns, 2007), thus bolster
ing an NPO’s financial stability (Carroll & Stater, 2009; Chang & Tuck-
man, 1994; Tuckman & Chang, 1991).
Using the above perspectives, some researchers have examined the
efficacy of revenue diversification as a combative strategy for loosening
resource dependencies in order to minimize NPOs’ financial vulnerabili
ties and volatility. For example, Tuckman and Chang (1991) and Chang
and Tuckman (1994) found revenue diversification to be positively asso
ciated with financial health, measured in terms of higher operating mar
gins and net assets. Greenlee and Trussel (2000) and Trussel (2002) also
found revenue diversifiers less financially vulnerable and less likely to
cut program expenses or face losses in net assets over three consecutive
years. Hager (2001) also found arts NPOs less likely to close when they
had diversified funding sources. Using a more robust dataset from the
National Center for Charitable Statistics (NCCS) Core 990 data, Carroll
and Stater (2009) found a positive association between revenue diver
sification and financial stability. The authors concluded that over time
NPOs can increase their financial stability by equalizing their reliance
on contributions, earned income, and investment income (Carroll & Sta
ter, 2009). Focusing on a subset of larger NPOs, Frumkin and Keating
(2011) also found the revenue diversification strategy to benefit NPOs
through “greater surplus margins and liquidity and a lower insolvency
risk” (p. 161).
The transaction costs theory, on the other hand, points to the nega
tives of revenue diversification. According to this theory, the complexities
of revenue diversification result in inefficiencies from managing multi
ple funding relationships, especially because funding sources are charac
terized by diverse motivations, preferences, and objectives (Grønbjerg,
1993; Pfeffer & Salancik, 2003; Young, 2007). Moreover, additional
transaction costs of time, attention, and money (Hager & Hung, 2019)
are required to support individual solicitations, fundraising competen
cies (Chikoto-Schultz & Neely, 2016), and the differential accountability
requirements (Chikoto, 2015; Ebrahim, 2003) of each revenue source.
This theory, therefore, cautions NPOs to review and understand each
funding source, as it relates to their missions and their ability to achieve
those missions using different funding streams.
A few empirical studies found support for the transaction costs associ
ated with revenue diversification. For instance, Foster and Fine (2007)
attributed the growth of 110 of the 144 NPOs that grew their annual
revenues to $50 million, between 1970 and 2003, to revenue concentra
tion. The authors found that 90% of those 110 NPOs relied on a single
funding source (Foster & Fine, 2007). However, the authors did note that
it was within the single funding sources that these NPOs diversified (Fos
ter & Fine, 2007), a phenomenon Chikoto and Neely (2014) referred to
as ‘within-source diversification.’ Frumkin and Keating (2011), however,
found no systematic influence of revenue concentration on mean growth
in total revenue, fixed assets, and program expenses for the sample of
larger NPOs on which their study focused.
Using more robust NCCS Form 990 digitized data (1998–2003),
Chikoto and Neely (2014) confirmed Foster and Fine’s (2007) finding
and found the revenue concentration strategy to be positively associated
with five-year growth in total revenue. This relationship also has been
confirmed by Lin and Wang (2016), who focused their study on New
Jersey human services and community improvement NPOs, as well as
by von Schnurbein and Fritz (2017), who focused on Swiss fundrais
ing charities. However, “increasingly becoming more [revenue] concen
trated over time may be unwise,” suggesting that revenue concentration
may be more effective at financial capacity building “when deployed
as a one-time strategy” (Chikoto & Neely, 2014, p. 579). Nonetheless,
the revenue concentration strategy has been associated with efficiency
benefits in the form of lower administrative and fundraising expenses
(Frumkin & Keating, 2011). ‘Revenue concentrators’ tend to rely on
earned income from government funders, and due to government’s high
accountability demands, such organizations are compelled to be cost-
conscious and to effectively manage their cash flows (Chikoto, 2015;
Frumkin & Keating, 2011).
Finally, Markowitz’s (1952) modern portfolio theory (MPT) is con
cerned with how each funding source adds to the portfolio (i.e., expected
return) and its volatility (risk). According to this theory, investors should
build their portfolios by balancing expected return and risk (or standard
deviation of return) of all revenues together, rather than simply diversi
fying revenue sources (Markowitz, 1952). Because this theory is rooted
more in business investment allocation strategies, it is not necessarily
about directing NPOs on how to access the appropriate funding sources
that help maximize their missions. Nonetheless, the theory allows for an
appreciation of the complexities of the risks and rewards associated with
multiple funding streams (Hung & Hager, 2019).
The MPT proposes three key features of portfolio selection. First, all
sources of revenue face risks from both economic and non-economic
conditions. These conditions can affect revenue from one or all sources
(Markowitz, 1959). Second, sources of revenue have different levels of
correlation among them. Simply diversifying revenue sources will not
eliminate risk if all sources are highly correlated. Therefore, the recom
mendation is that organizations’ portfolios should consist of revenue
sources that are low or negatively correlated with each other (Markowitz,
1959). Third, managers should design their portfolios based on organiza
tions’ objectives; the two most common objectives are high return and
low risk. However, there is a trade-off between high expected return and
low risk. A portfolio with high return is likely to be subject to a high
degree of risk; therefore, the choice of portfolio will depend on the will
ingness and ability of an organization to take risk (Markowitz, 1959).
In their meta-analysis, Hung and Hager (2019) observed a disconnec
tion between how revenue diversification is predominantly measured
and the MPT foundation upon which the HHI has been purported to
rest. Consequently, only a handful of empirical investigations have more
closely applied the MPT perspective in an effort to understand the influ
ence of revenue diversification on nonprofit financial health (Grasse,
Whaley, & Ihrke, 2016; Jegers, 1997; Kingma, 1993; Mayer, Wang,
Egginton, & Flint, 2014). For example, Kingma (1993) applied the MPT
to study the financial predictability of nonprofit foster care organizations
in New York state. The author found that these organizations gained
more financial predictability through increased funding from the govern
ment; however, relying on a revenue mix comprising donations, fees for
services, and special events increased organizations’ financial risk. These
results demonstrate that neither depending on one revenue source nor
complete revenue diversification will minimize an NPO’s income risk.
Instead, an NPO can choose the right level of revenue diversification by
considering the expected return, risk, and correlation between different
sources of revenue (Kingma, 1993).
In recognition of the MPT’s suggestion that diversification can increase
financial stability at the expense of reduced expected revenue, Mayer
et al. (2014) sought to test this relationship, in addition to testing the
effects of different revenue diversification compositions on volatility and
expected revenue. The authors concluded that the efficacy of the rev
enue diversification strategy on reducing financial volatility (or increas
ing stability) was largely influenced by the composition of one’s revenue
portfolio or mix and how that composition changed (Mayer et al., 2014).
For instance, a diversification strategy of replacing investment income
with donations reduced volatility (increased stability) and also increased
expected revenue. However, a diversified revenue mix achieved through
replacing earned income with donations only increased financial stability
at the expense of expected revenues (Mayer et al., 2014).
Qu (2016) sought to understand the optimal mix of revenue sources
that best serve an NPO by applying the MPT on nonprofit finance, using
the NCCS Form 990 digitized data (1998–2003). Focusing on five rev
enue sources—contributions and grants; land, buildings, and equipment
for investment (rental properties); savings and temporary cash invest
ments; securities; and sales from special events, Qu (2016) found that
revenues from contributions and grants and sales from special events had
the highest and second-highest expected return and risk, respectively,
compared to the remaining three revenue sources. In addition, sales from
special events and rental properties had a low level of correlation with
contributions and grants, suggesting that they were a good revenue mix
for minimizing financial risk (Qu, 2016). Conversely, savings and tempo
rary cash investments, and securities, and contributions and grants were
highly correlated, suggesting that the revenue mix was incompatible and
therefore, prone to high financial risk (Qu, 2016).
Although the featured studies above demonstrate mixed results, they
each reveal an aspect of the revenue diversification strategy that NPOs
ought to pay close attention to, as they select a revenue strategy that best
helps them remain financially health and to ultimately achieve their mis
sions. Below we address factors that influence revenue diversification.
Drivers of Revenue Diversification

Studies have shown that NPOs have different abilities in diversifying
their revenue structures, depending on their organizational character
istics, management, and environment (Chang & Tuckman, 1994; Lin,
2010; Young, 2007; Zhu, Ye, & Liu, 2018). One key organizational
characteristic that affects NPOs’ ability to diversify their revenue sources
is the type of activities in which they engage (Chang & Tuckman, 1994;
Young, 2007). For example, services offered by a cancer clinic confer or
generate private, group, and public benefits, making it easier to attract
funding from multiple sources, such as patients, donations, governments,
and community organizations (Chang & Tuckman, 1994; Fischer, Wil
sker, & Young, 2010; Wilsker & Young, 2010; Young, 2007). This result
is different from an environmental group’s services, which confer group
benefits and thus primarily attract membership dues from those who are
concerned about the environment, along with government grants, due
to the benefit that protecting the environment may confer on the general
public. Additional organizational characteristics that positively drive rev
enue diversification include organizational age, employee size, volunteer
size, and growth of programs and services (Lin, 2010).
From a management perspective, research has found the following fac
tors to positively drive revenue diversification: spending more money on
fundraising (Chang & Tuckman, 1994), having an internal fund develop
ment staff, attaching more importance to revenue diversification, having
more board meetings each year (Lin, 2010), involving boards in resource
acquisition, and being more accountable to multiple stakeholders (Zhu
et al., 2018). In terms of environmental factors, NPOs that operate in less
competitive regions (i.e., high GDP per capita and low number of organi
zations in the region) and have better relationships with external partners
were more likely to diversify their revenues (Lin, 2010; Zhu et al., 2018).
Hager and Brudney (2011) and von Schnurbein and Fritz (2017)
referred to some of the above drivers in terms of ‘nature,’ that is, those
conditions that are not readily amenable to managerial interventions or
response, such as legal form, organizational age, and size; or ‘nurture,’
those that can be influenced by management. Focusing on Swiss NPOs,
von Schnurbein and Fritz (2017) found that the wider the geographic
radius of an NPO’s activity (e.g., international focus), the higher the
revenue concentration of particular revenue sources, and the larger a
Swiss NPO became (measured by total revenue, thus signifying increased
professionalism), the more diverse their revenue streams become. With
regards to nurture factors, such as shifting one’s primary source of income
over time, board diversity, and board size, the authors found that NPOs
that did not shift their primary funding source over time tended to have
more concentrated revenues (von Schnurbein & Fritz, 2017). However,
the authors found that the more diversified and the larger the board, the
higher the diversity of revenues an organization had.
Discussion and Conclusions

What we know so far is that “revenue diversification is a central feature
of many financial health and sustainability models” (Hung & Hager,
2019, p. 6). However, is revenue diversification always a net positive?
Hung and Hager’s (2019) meta-analysis found a small, positive asso
ciation between revenue diversification and financial health across 40
studies done predominantly in the United States. These findings dem
onstrate that the relationship between revenue diversification and
nonprofit financial health, whether measured as capacity or stability,
is neither simple nor straightforward, nor has this complication been
comprehensively reflected in the applications of the HHI. On the one
hand, revenue diversification has been associated with financial stability
and reduced financial distress (Carroll & Stater, 2009; Chang & Tuck-
man, 1994; Greenlee, 2002; Greenlee & Trussel, 2000; Hager, 2001);
on the other, its inverse has been associated with financial growth
(Chikoto & Neely, 2014; Chikoto-Schultz & Neely, 2016; Foster &
Fine, 2007; Lin & Wang, 2016; von Schnurbein & Fritz, 2017). Fur
thermore, revenue diversification itself is influenced by other nature and
nurture factors.
As noted above, the rich revenue diversification literature to date can
be summarized into several theoretical advantages and disadvantages
of the revenue diversification strategy, all amply captured by Hager and
Hung (2019). On the positive, relying on broader funding streams pro
vides some NPOs with flexibility and autonomy when donor preferences
and motivations change, and when economic downturns cause signifi
cant funding drops and cuts (Carroll & Stater, 2009; Chang & Tuck-
man, 1994; Froelich, 1999; Greenlee & Trussel, 2000; Hager, 2001;
Mitchell, 2014; Pfeffer & Salancik, 2003). Not only are NPOs able to
weather financial storms, but having a cushion also allows NPOs to be
less resource-dependent on a single funder, thus allowing them to shift
strategic direction when needed (Pfeffer & Salancik, 2003).
Efforts NPOs take to diversify their funding sources have also been
linked to the need to establish community embeddedness or network
connectedness (Hager, Galaskiewicz, & Larson, 2004; Hung & Hager,
2019), thus improving NPOs’ community buy-in, legitimacy, relevance,
or recognition in the community (Bielefeld, 1992; Galaskiewicz, 1990).
In the event of financial shocks, NPOs may be able to leverage their com
munity connections for financial stability. Finally, diversified revenues
can theoretically “represent opportunities for growth” (Hung & Hager,
2019, p. 8), by allowing NPOs the confidence to pursue new revenue
streams. However, corroborating Foster and Fine’s (2007) research,
Chikoto and Neely (2014) found that relying on narrower or fewer fund
ing streams contributed to financial growth, but for a season.
On the negative, the revenue diversification strategy has been associ
ated with increased complexity and risk resulting from the reliance on
multiple and diverse funding sources. Consistent with the risk-return
concept in modern portfolio theory (Markowitz, 1952), by failing to
account for how different revenue sources may relate to one another
(Qu, 2016), or misunderstanding the risks associated with each funding
stream (Grasse et al., 2016), or how revenue sources might crowd others
in or out (Andreoni & Payne, 2011; Brooks, 2000), merely diversifying
for diversification’s sake might adversely affect an organization’s finan
cial health.
Revenue diversification has also been associated with increased admin
istrative costs, fundraising costs (Frumkin & Keating, 2011; Kingma,
1993), and management complexity (Grønbjerg, 1993). Given the diver
sity and mutability of donor motivations, preferences, and expectations
(Fischer et al., 2010; Wilsker & Young, 2010; Young, 2007), diversifi
cation may mean establishing multiple management systems and hiring
expertise to solicit, monitor, and provide differential accounts to multiple
funding sources (Chikoto, 2015; Frumkin & Keating, 2011; Grønbjerg,
1993; Hung & Hager, 2019). Such administrative costs and manage
ment complexity could inadvertently lead to goal conflicts from satisfy
ing differential funding criteria (Ferris & Graddy, 1989; Froelich, 1999;
Weisbrod, 1998), culminating in mission drift (Froelich, 1999; Sacristán
López de los Mozos, Rodríguez Duarte, & Rodríguez Ruiz, 2016).
Based on the preceding, it is clear that the relationship between rev
enue diversification and financial health is indeed very complex and is
influenced by multi-dimensional factors. Chief among them are nature
drivers of revenue diversification (von Schnurbein & Fritz, 2017), espe
cially NPOs’ missions and the services flowing from them (Fischer et al.,
2010; Grønbjerg, 1993; Weisbrod, 1998; Wilsker & Young, 2010;
Young, 2007). With the organizational mission as the touchstone, NPOs
should aim to strategically align their funding streams more tightly with
their missions, the services that flow from them, and the nature of the
benefits those services confer on various beneficiaries and benefactors
(Young, 2007). To confirm, Hung and Hager’s (2019) meta-analysis
found revenue diversification to have a mildly positive effect on the finan
cial health of NPOs in the arts, education, human services, religion, and
health subsectors.
This chapter concludes with two normative reminders for NPOs: one,
that “the key to organizational survival” rests in an organization’s “abil
ity to acquire and maintain resources” and in how effectively it manages
and deploys them (Pfeffer & Salancik, 2003, p. 2). Whether NPOs rely
on fewer or more funding streams should thus first be clarified through
their missions and services, as suggested by Young (2007). Ultimately,
the composition of an NPO’s funding portfolio or mix matters (Mayer
et al., 2014), and the mix must be such that it addresses three basic issues:
covering current operations, in terms of current costs to meet the organi
zation’s mission achievement in the short term; financing longer term cap
ital needs, should the NPO need to expand in the future; and addressing
strategic adjustment issues such as possible interactions among funding
sources, the guarantee of solvency, mission achievement, risk manage
ment, and administrative feasibility (for details, see Young, 2007).
A second reminder is that, because of the power asymmetry inherent in
resource exchanges within funded relationships, not all funding sources
behave equally. NPOs should not neglect monitoring the degree to which
different funding streams engender unhealthy dependencies, especially
ones that threaten to undermine their sustainability, pose the risk of
mission creep or mission dilution, or cause legitimacy erosion (Froelich,
1999). This awareness calls for a keen understanding of each funding
stream’s motives, preferences, and objectives, as noted above, vis-à-vis
one’s organizational mission, identity, and ability to achieve the mission.
This necessity is in addition to understanding the risk-return tradeoffs
associated with different funding sources. Taking all these factors into
account, how and whether an NPO diversifies should be a thoughtful,
strategic choice or decision. Whether diversification is a net positive or
negative will vary based on each NPO and its unique internal and exter
nal circumstances.
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9 Nonprofit Profits
Slack, Surplus, and Reserves
Thad D. Calabrese and Todd L. Ely
Introduction
Despite the term ‘nonprofit,’ organizations classified as such are permit
ted to earn profits, which are simply revenues in excess of expenses in
any given year. The defining characteristic of these nonprofit organiza
tions (NPOs) is the ‘non-distribution constraint,’ in which these annual
or accumulated profits may not be distributed to a board of directors or
other controlling entity (Hansmann, 1980). Other than this explicit dis
tribution, NPOs have significant discretion over how these excess funds
are ultimately used. This chapter addresses the issues of slack resources
and surplus in NPOs, summarizes the current state of literature on these
topics, provides an empirically-based snapshot of slack resources and
surplus in NPOs, and considers what is currently unknown or unclear
in the literature.
Definitions
Managerially, slack resources are those excess and available funds that
may be employed in times of need (caused perhaps by routine business
cycles, natural disasters, or human-caused events), to take advantage of
potential opportunities, or to grow and expand an organization’s service
offerings. Whereas the term slack has a negative connotation in everyday
use, it is widely accepted that NPOs require surplus annual revenues (that
is, revenues in excess of expenses) to fulfill long-term missions (Bowman,
2011). Slack can take many forms in NPOs. Research has focused on rel
atively liquid assets that might be easily accessed (Calabrese, 2013, 2018;
Grizzle, Sloan, & Kim, 2015). However, as noted by Sloan, Charles,
and Kim (2016), some NPO managers consider other forms of slack as
well. For example, lines of credit which are short-term unsecured bor
rowings are a common tool to manage liquidity concerns like periodic
cash flow needs; investment accounts may serve a similar purpose by
permitting managers to sell assets when needed or pledge these assets as
collateral for borrowing;1 some even consider fixed assets a form of slack
Nonprofit Profits 115
if managers know they can sell these assets relatively quickly. However,
for purposes here, slack refers to relatively liquid and available assets that
can be inexpensively deployed when needed.
One important source of slack is annual profits or surpluses. These
annual profits are an important source of internal financing for NPOs.
For-profit firms have well-developed equity markets for acquiring needed
capital, and an equivalent market for NPOs (for example, for donations)
does not exist. The nonprofit sector refers to annual profits or losses
as ‘changes in net assets,’ even though all of these terms are function
ally equivalent. The nonprofit sector has unique accounting require
ments, however, that further complicate the topic and specifically affect
availability of resources (a key criterion of slack). Donors may restrict
how or when an NPO may use a particular contribution. These donor-
restricted contributions can result in the recording of revenues (and sub
sequently result in a profit) even though the organization cannot spend
the resources.
For example, suppose an NPO receives a $100,000 donation, and the
contributor states that these funds are never to be spent directly, but any
earnings derived from the donation may be spent. This is an example of
what is termed a true endowment. From the perspective of the organiza
tion, the $100,000 donation exists to generate future revenues that fund
future spending. However, in the year the donation is recorded, the NPO
would record a revenue of $100,000 in addition to any other surplus
generated that year. Hence, when considering NPOs’ annual profits, one
should consider the role of donor-imposed restrictions. Not all profits are
available for an NPO to use at their discretion, as this true endowment
example clearly illustrates.
All available resources are best not thought of as ‘slack’ either. Here
we further distinguish between assets that are held for working capital—
that is, cash held largely for operational and transactional purposes—
and operating reserves—that is, liquid available resources held primarily
for temporary emergencies or growth opportunities. Operating reserves,
then, may be defined as relatively liquid assets free from donor restric
tions that NPOs can use with some degree of discretion. In some NPOs,
these reserves may actually be partially or wholly comingled with work
ing capital with no governance policy about how they may be used; other
NPOs’ operating reserves may be held in separate bank accounts distinct
from working capital and have strict policies about their usage. To sum
marize, slack is typically represented by informal or formal operating
reserves accumulated through annual operating surpluses.
NPOs’ governing boards are also free to designate accumulated sur
pluses as board-designated endowment, or ‘quasi-endowment’ (Cala
brese & Ely, 2017). The designation serves as a formal earmarking of
slack for specific purposes typically distinct from ongoing operations,
although the funds remain technically unrestricted (from an accounting
116 Calabrese and Ely
perspective) in the absence of external donor restrictions. The quasi-
endowment satisfies the ‘available’ portion of the definition for slack,
although NPO boards often hesitate to use the funds for anything but the
non-binding designated purpose. If the quasi-endowment is invested sim
ilarly to true endowment, then the funds may not fully meet the expecta
tion of liquidity represented in the definition of slack.
Throughout the chapter, we provide an historic look at key indica
tors of annual and accumulated surplus for 501(c)3 NPOs, including the
margin ratio (annual surplus or loss as a share of revenue) and operating
reserves ratio (operating reserves as a share of annual expenses). The
initial snapshot of NPO surplus and reserves is based on the 1998–2000
period using data from the National Center on Charitable Statistics
(NCCS)—GuideStar National Nonprofit Research Database. This data
base covers all public charities required to file Form 990, a standard
ized annual tax filing required by the Internal Revenue Service (IRS). The
subsequent snapshot captures the population of Form 990s filed during
the 2015–2017 calendar years via the IRS Form 990 Annual Masterfile
Extracts.2 We follow Blackwood and Pollak (2009) by primarily focusing
our discussion on the relative median levels of surplus and reserves and
do not consider the statistical significance of differences.
What We Know About NPOs and Surpluses/Margin

At one point, theories about the behavior of NPOs assumed that the
financial goal of these entities was to break even—that is, that managers
sought to accumulate no surpluses and targeted annual expenses to equal
revenues (for example, see Scanlon, 1980). Any profits, therefore, simply
reflected bad financial planning, unexpected shocks, or good luck. The
expectation was, nevertheless, that any slack generated would eventually
be used to fund charitable output (Hansmann, 1980). Alternately, Weis
brod (1988) suggested that surpluses provided managers with satisfac
tion potentially beyond meeting the mission of the organization. Actual
budgeting practices of NPOs reflect both of these views on NPO financial
objectives. In fiscal year 2017, a Nonprofit Finance Fund (NFF) survey
found that 52% of NPOs budgeted to break even financially and only
29% reported budgeting for an operating surplus. The actual financial
results in 2017 flipped these figures with 50% of organizations achieving
an operating surplus and 26% breaking even (NFF, 2018).
Tuckman and Chang (1992) hypothesized that NPOs derived utility
from earning and accumulating surpluses that was not explained simply
by mission goals. They articulated five reasons NPOs might seek to accu
mulate profits: 1) to subsidize clients unable to pay the full cost of the
service (which is arguably a mission goal of NPOs); 2) diversification into
new areas; 3) a rainy day fund; 4) independence from donors; and 5) a
measure of success. The important takeaway from Tuckman and Chang
(1992) is that surpluses are not accidental and are a prime and rational
financial goal of NPOs.
Calabrese (2012) expanded upon this finding and modelled a goal of
NPOs not just as surpluses, but as unrestricted surpluses free from donor
rules. Further, whereas Tuckman and Chang (1992) implicitly assumed
that NPOs would seek and accumulate any levels of surpluses, Calabrese
(2012) finds low levels of surplus accumulations, perhaps because of
concerns of appearing too wealthy. NPOs have several reasons to avoid
excessive slack and not to appear too financially successful. Donors may
wish that NPOs spend money now on programs rather than accumu
lating savings for the future. Further, organizations that depend upon
third-party payers (such as hospitals in the United States) may not want
to report large amounts of slack lest insurance companies and other pay
ers try to negotiate payments lower (Calabrese, 2011a). Nevertheless,
the existing literature finds evidence supportive of NPOs seeking to earn
annual surpluses, whereas avoiding reporting excessive amounts of accu
mulated resources (Calabrese, 2011a).
Measuring NPO surpluses or margin appears simple and straightfor
ward, but existing research highlights the surprising complexity of the
concept (Bowman et al., 2012). Surplus, or deficit if negative, represents
the dollar amount of the revenues in excess of expenses, whereas mar
gin typically communicates the surplus or deficit relative to the organi
zation’s annual revenue and support. Measurement challenges stem, in
large part, from the common use of administrative data via the IRS Form
990 to determine surpluses or margin, but also from the persistence of
cash accounting in the nonprofit sector (Calabrese, 2011b). Bowman
et al. (2012) present five different measures of NPO surplus and are espe
cially critical of the most commonly used calculation, which they refer
to as ‘Surplus per Form 990.’ Defining surplus or margin as ‘revenue
less expenses’ is convenient, but it is important for researchers and prac
titioners to be aware of the limitations and implications of surplus and
margin measures generated using data from the IRS Form 990. Specifi
cally, this simple measure of surplus or margin fails to include ‘unrealized
capital gains and losses, donated services, and recovered grants,’ while
including realized capital gains and restricted gifts and grants (Bowman
et al., 2012). Surplus generated purely from operations also differs from
surplus resulting from investment gains. The former suggests operating
revenues are sufficient to support “mission-related expenses” (Zietlow,
Hankin, Seidner, & O’Brien, 2018, p. 293).
Despite these limitations of the surplus per Form 990, the measure pro
vides a useful indicator that, when compared to total revenue as the mar
gin ratio, illustrates the relative magnitude of excess resources acquired
by the NPO during the year.3 The literature provides some guidance on
the necessary size of average annual surpluses to sustain operations at
existing levels. Bowman (2011), for example, argues for a ‘sustainability
principle’ where annual NPO surpluses are equal to or greater than a
return on assets matching the long-term inflation rate.
A majority of NPOs, 65% in 1998–2000 and 59% in 2015–2017, gen
erated an annual surplus (see Table 9.1 for details). The median surpluses
represented 3.7% and 2.4% of revenues for the 1998–2000 and 2015–
2017 periods, respectively. Adjusting for average inflation during these
years, the median surpluses are similar at 1.3% and 1.4%, respectively.
The numbers suggest that the median NPO during these periods gener
ated a surplus sufficient to keep pace with rising costs. Median surplus
levels differ substantially across nonprofit subsectors. Consistent across
both time periods, ‘education’ organizations have relatively high margins
whereas ‘human services’ organizations lag the sample averages. Organi
zations with expenses in the lowest quartile have median margins more
than double their sample medians, which may reflect that it does not take
much absolute surplus relative to a small amount of revenue to have a
significant margin ratio. Despite median margin ratios that are similar to
the overall samples, NPOs with expenses in the top 5% of organizations
more frequently earn a surplus. Older organizations, 20 years or more
since the ruling date, more commonly operate with a surplus during the
early period, but there is no difference in the later sample.
NPOs with a majority of revenue from private contributions experi
ence higher median margins, 5.5%, compared to those primarily depend
ent on government grants, 1.7%, or program service revenue, 1.5%, in
the 1998–2000 time period. The trend is also apparent in 2015–2017
financials, despite slightly different revenue categories.
What We Know About NPOs and Reserves

The literature on surpluses assumes that one purpose of seeking profits
is accumulating rainy day funds to protect the organization during an
economic downturn. More recently, research has sought to analyze which
NPOs accumulate reserves for this purpose and whether these reserves
serve their purposes. Many financial experts recommend three months’
worth of reserves, equivalent to 25% of annual operating expenses, to
protect an organization from revenue shocks. Blackwood and Pollak
(2009) note that reserves are an indicator of financial health and found
that 57% of the Washington, DC sample they examined had reserves less
than three months’ worth of expenses. Their analysis found that older and
larger NPOs were more likely to have the recommended reserve amount.
Those that rely on government support and self-generated program rev
enues reported less reserves than donative NPOs. These results contra
dict theory, which would speculate that self-generated revenue is easier to
retain than other revenue sources. At the same time, using funds received
from government support and contracts to fund reserves rather than pro
vide the associated service is occasionally discouraged or disallowed.
Table 9.1 Median Margin Ratio and Positive Margin Share of NPOs, 1998–2000 and 2015–2017
Time Period 1998–2000 2015–2017
Number of Margin Share with Number of Margin Share with

Organizations Ratio a Positive Organizations Ratio a Positive
(Median) Margin (Median) Margin
(Surplus) (Surplus)
All 274,134 3.7% 65.1% 503,353 2.4% 59.4%

Subsector
Arts, culture, and humanities 22,681 5.7% 65.9% 45,738 2.6% 58.3%
Education 33,989 7.4% 73.4% 74,934 3.6% 63.7%
Health 58,167 2.8% 64.2% 77,430 2.4% 60.7%
Human services 107,814 2.4% 61.7% 181,638 1.4% 56.7%
Other 49,875 6.3% 67.6% 117,959 3.6% 60.7%
Size (total expense percentile)
<= 25th percentile 68,534 8.9% 66.1% 125,839 7.8% 62.0%
> 25th percentile, <= 75th percentile 137,067 3.2% 63.0% 251,676 1.7% 56.7%
> 75th percentile, <= 95th percentile 54,842 2.5% 67.1% 100,679 1.6% 60.6%
> 95th percentile 13,691 3.4% 72.9% 25,159 2.3% 67.5%
Organization age
Ruling date (<= 20 years ago) 155,276 3.5% 62.5% 232,915 2.9% 59.8%
Ruling date (> 20 years ago) 110,790 4.0% 69.0% 263,985 2.0% 59.2%
Revenue dependence (> 50%)
Private contributions 106,454 5.5% 69.1% – – –
Contributions, gifts, and grants – – – 270,648 3.1% 61.0%
Government grants 47,431 1.7% 63.0% – – –
Program service revenue 103,039 1.5% 58.4% 177,598 1.3% 56.7%
Note: Direct comparisons across time periods should be made with caution for two primary reasons. First, organizations using the cash basis of accounting
are omitted from the 1998–2000 sample, but are necessarily included in the 2015–2017 sample. Second, the revised IRS Form 990 made changes to some
fields used in the calculation of these financial ratios. The “Contributions, Gifts, and Grants” category for the 2015–2017 sample includes grants from gov
ernment, unlike the “Private Contributions” category applied to the 1998–2000 sample.
The classic question from practitioners related to NPO operating
reserves is ‘How big should the reserves be?’ The realistic, but less than
satisfying, answer is that ‘it depends’ on the organization (Nonprofit
Operating Reserves Initiative Workgroup (NORI), 2008). The previously
mentioned rule-of-thumb—reserves of at least three months of operat
ing expenses—is simply a minimum goal. Sector-wide rules-of-thumb
are typically accompanied by calls to tailor reserve requirements to the
specific organization and risk profile. NPOs face a double-edged sword
of being told to build adequate operating reserves, while being open to
potential criticism when reserves are deemed excessive by external stake
holders. A formal reserves policy justifies the NPO’s actual or desired
level of reserves and communicates to stakeholders that the accumulated
surpluses are neither arbitrary nor wasteful. A board-approved operating
reserve policy provides guidelines for reserve accumulation, investment
of reserves, drawdown, and replenishment with considerations of liquid
ity, risk, and strategic priorities (for guidance, see ‘Developing a Written
Operating Reserve Policy’ in NORI, 2010).
Calabrese (2013), using a similar definition of reserves as Blackwood
and Pollak (2009), finds organizational size is not a significant predictor
of reserves. Further, Calabrese (2013) does find that the revenue portfo
lio of the organization influences reserve size, which differs from Black-
wood and Pollak’s (2009) descriptive analysis; those more dependent
upon government funds hold less reserves, and donations are not a sig
nificant predictor. To the extent that reserves are an indicator of financial
health, these findings suggest that government funds may actually reduce
the financial sustainability of the sector. Further, concerns that donors
will withdraw future donations because of reserves is not supported—
that reserves do not make NPOs appear ‘lean’ and face consequences
as a result (Mitchell, 2017). In fact, the findings of Calabrese (2011a) in
which donations are only affected by extremely high levels of accumu
lated resources (measured in this case as net assets) may be applicable to
reserves as well.
Sloan et al. (2016), rather than relying exclusively on administra
tive data, interview NPO managers directly and find that the low
levels of reserves found in Blackwood and Pollak (2009) and Cala
brese (2013) may reflect that managers rely on other sources for their
reserves. Whereas reserves may reflect good business practices, Sloan
et al. (2016) point out that NPO managers operate in a unique and dif
ferent space in which sound business practices may not always be pos
sible. Current needs may supersede future potential needs, and NPOs
as a result may have a difficult time accumulating surpluses and sav
ing for the future. Further, many NPO funders make saving for the
future virtually impossible by providing contracts and awards that fail
to reflect the total cost of delivering NPO services (Marwell & Cala
brese, 2015). Nevertheless, these substitutes for reserves help explain
the levels of reserves in the sector and display management adaptation
to the realities of the sector.
Primarily, reserves are intended to help maintain organizational spend
ing during difficult economic times. Such resources stave off challeng
ing service cuts during times when there might be an increased demand
for services. Tuckman and Chang (1991) define NPOs as financially
vulnerable if they cannot withstand a fiscal shock without scaling back
programs. Calabrese (2018) analyzes whether reserves do in fact help
stabilize spending by NPOs during times of volatility. The results indicate
that reserves help, but they are inadequate at low current levels. Fur
ther, the three-month rule of thumb may be insufficient to stabilize NPO
spending, as much of the volatility exceeds this level. Given the existing
cultural taboo around NPOs accumulating too much wealth, whether or
not the sector can accumulate the resources necessary to build reserves
that provide effective relief during times of economic volatility remains
an open issue.
Whereas the benefits of reserves and slack are well known and artic
ulated, others have also pointed out the potential costs of such excess
resources. Unlike in the for-profit sector, no mechanism exists in the non
profit sector to return unused or unneeded revenues to donors or provid
ers (Core, Guay, & Verdi, 2006). Because the non-distribution constraint
forbids claims on these resources, excess funds may sit indefinitely with
the NPO. Core et al. (2006) find that NPOs with excess cash balances do
exhibit lower program spending and higher chief executive officer (CEO)
and director compensation compared to NPOs with lower cash balances.
Frumkin and Keating (2010) also suggest that CEO compensation is
higher when NPOs maintain excess revenues rather than spending them.
However, Calabrese and Gupta (2019) report that these findings around
agency problems and cash balances in NPOs are highly sensitive to model
specification. Calabrese (2018) also finds no evidence of agency prob
lems with respect to reserve accumulation in NPOs. Therefore, whether
maintaining slack resources leads to organizations’ agency problems is an
unsettled concern in the literature.
The IRS Form 990 provides information, albeit imperfect, with which
to calculate operating reserves and the operating reserves ratio.4 Oper
ating reserves represent available funds, so the basis of the calculation
is an organization’s unrestricted net assets (which are now termed ‘net
assets without donor restrictions’ on audited financial statements). The
unrestricted net assets are then reduced by any equity in fixed assets. The
operating reserves ratio divides operating reserves by annual expenses less
depreciation: (Unrestricted Net Assets − Property, Plant, and Equipment,
net of Long-Term Debt) / (Total Expenses − Depreciation) (NORI, 2008).
The operating reserves ratio, and its calculation using the Form 990, is
criticized by some for potential measurement error due to the unrestricted
net assets including receivables, prepaid expenses, and inventories, which
are not readily available for use as reserves (Zietlow et al., 2018). Work
ing capital, cash for ongoing transactions, is also included in unrestricted
net assets so the operating reserves ratio can overstate the level of reserves
(Calabrese, 2013). A more conservative definition of operating reserves
is available to address some of these concerns about the availability of
illiquid assets (Calabrese, 2013; NORI, 2008). Operating reserves cannot
be estimated for organizations filing the IRS Form 990-EZ, which does
not differentiate between restricted and unrestricted net assets.
Operating reserves for the median NPO are sufficient to cover 2.9
and 4.2 months of expenses in our 1998–2000 and 2015–2017 samples,
respectively. Nearly a fifth of each sample has zero or negative operating
reserves (see Table 9.2 for details). Alternately, 49% of organizations had
the recommended minimum three months of operating reserves in the
early sample and 57% in the later time period. The apparent growth in
NPO operating reserves may reflect improved finances over time, changes
in financial reporting via the Form 990, or a combination of factors.
‘Human services’ organizations consistently have lower median operat
ing reserves ratios relative to other subsectors across the two samples,
whereas those broadly classified as ‘other’ organizations have relatively
large reserves. Smaller NPOs, based on expenses, have dramatically
higher median reserves ratios than larger organizations in both samples.
The lower reserve levels of larger NPOs may reflect the greater ability of
such organizations to directly access capital markets rather than rely on
accumulated internal savings, including the issuance of long-term tax-
exempt bonds (Calabrese & Ely, 2016; Ely & Calabrese, 2016). Older
organizations have more opportunity to build reserves through accumu
lated surpluses. Both samples reflect this expectation, as older organi
zations have substantially higher median reserves ratios than younger
NPOs. Similar to the surplus pattern, NPOs with a majority of revenue
coming from government grants and program service revenues have
much lower reserves levels, only 1.35 months’ worth for those depending
on government grants, than those depending primarily on contributions.
The difference is likely a reflection of restrictions that accompany govern
ment grants compared to largely unrestricted private contributions and
thin margins from program services. Overall, these descriptive findings
on NPO operating reserves paint a more optimistic picture but gener
ally align with those of Blackwood and Pollak (2009), despite their nar
rower focus on Washington, DC-area organizations and the exclusion
of hospitals, higher education institutions, and other organization types.
What Do We Still Not Know?

Despite the importance of margins and reserves to the smooth opera
tions of NPOs, whether to endure a fiscal shock or to finance growth
opportunities or expansions, the literature is nascent and provides very
Table 9.2 Median Operating Reserves Ratio and Shares of NPOs by Operating Reserve Size, 1998–2000 and 2015–2017
Time Period 1998–2000 2015–2017
Number Operating Share of Organizations With: Number Operating Share of Organizations With:
of Orgs. Reserves of Orgs. Reserves
Ratio No 3-Month 6-Month 12-Month Ratio No 3-Month 6-Month 12-Month
(Median) Operating Operating Operating Operating (Median) Operating Operating Operating Operating
Reserve Reserve Reserve Reserve Reserve Reserve Reserve Reserve
All 274,134 24.0% 19.5% 49.1% 33.7% 20.9% 503,353 35.0% 17.6% 57.1% 41.8% 27.0%
Subsector
Arts, culture, 22,681 20.9% 25.4% 46.8% 33.6% 22.0% 45,738 35.9% 20.1% 56.8% 43.1% 29.9%
and
humanities
Education 33,989 25.3% 20.9% 50.3% 36.0% 23.2% 74,934 34.5% 18.5% 56.7% 41.6% 27.4%
Health 58,167 25.6% 17.5% 50.6% 33.4% 20.1% 77,430 36.3% 15.8% 58.4% 42.4% 27.0%
Human 107,814 20.8% 19.5% 45.6% 29.7% 16.9% 181,638 31.6% 17.9% 55.2% 38.7% 23.0%
services
Other 49,875 33.2% 17.6% 55.5% 41.3% 28.3% 117,959 42.4% 16.2% 60.3% 46.5% 32.0%
Size (total
expense
percentile)
<= 25th 68,534 43.8% 20.1% 59.8% 47.5% 34.4% 125,839 84.3% 19.3% 68.6% 59.3% 46.9%
> 25th, 137,067 22.0% 19.4% 46.9% 30.6% 17.7% 251,676 33.0% 16.1% 56.4% 39.3% 22.5%
<= 75th
> 75th, 54,842 16.2% 20.3% 39.7% 23.9% 13.1% 100,679 22.4% 18.6% 47.3% 29.8% 16.6%
<= 95th
> 95th 13,691 29.9% 14.4% 55.2% 34.6% 15.5% 25,159 21.0% 20.6% 46.1% 28.0% 13.6%
(Continued)
Time 1998–2000 2015–2017

Period
Number Operating Share of Organizations With: Number Operating Share of Organizations With:
of Orgs. Reserves of Orgs. Reserves
Ratio No 3-Month 6-Month 12-Month Ratio No 3-Month 6-Month 12-Month
(Median) Operating Operating Operating Operating (Median) Operating Operating Operating Operating
Reserve Reserve Reserve Reserve Reserve Reserve Reserve Reserve
Organization
age
Ruling date 155,276 21.9% 21.7% 47.2% 32.7% 20.8% 232,915 29.5% 19.8% 53.4% 38.5% 24.6%
(<= 20 years
ago)
Ruling date 110,790 27.1% 16.1% 52.0% 35.2% 21.0% 263,985 40.5% 15.4% 60.7% 45.0% 29.2%
(> 20 years
ago)
Revenue
dependence
(> 50%)
Private 106,454 22.8% 17.4% 48.0% 32.4% 20.0% – – – – – –
contributions
Contributions, – – – – – – 270,648 35.8% 15.6% 57.8% 42.2% 26.9%
gifts, and
grants
Government 47,431 11.2% 21.9% 30.0% 15.2% 7.0% – – – – – –
grants
Program 103,039 19.5% 22.5% 43.9% 26.4% 12.5% 177,598 25.1% 21.6% 50.1% 32.9% 17.3%
service
revenue
Note: See note in Table 9.1.
few definitive findings. Whereas we know positive margins should be a
goal of average NPOs, we need additional studies with strong research
methodologies to validate this. Further, how organizational governance
influences (or not) the goal of profit accumulation is not explored in
the current literature. Given the preponderance of NPO board members
with experience operating in the for-profit sector, research that analyzes
whether such experience affects this goal is a natural avenue for explo
ration. This governance might relate to the entire board of directors,
or to distinct components of the board such as finance or audit com
mittees. The literature has little to offer NPOs who are currently not
profitable but wish to become so. Does diversifying revenues lead to
more profits? Or does expanding current service offerings? Does stream
lining costs improve the bottom-line long term? Or does this reduce the
quality of services and undermine the mission of the NPO? These ques
tions about organizational revenue portfolios and cost structures could
inform knowledge about best practices for NPOs. Future research might
also expand into smaller voluntary agencies, in which the bulk of an
organization’s resources take the form of donated labor or services. How
do these cooperative entities view surpluses? Do they even seek to earn
profits like charitable NPOs do? Or is this goal muted because much of
the resources are nonfinancial anyway?
Similarly, we know very little about reserves. Future research should
examine NPOs of different sizes to determine if reserves help protect
organizations from fiscal shocks. Calabrese (2018) focused on large
NPOs, but the vast majority of the sector is small organizations.
Another area unexplored is whether holding or using reserves improves
financial outcomes of NPOs. Because some services offered by NPOs
lose money, it is not clear whether maintaining these services during
bad economic times using reserves should have a positive effect on
long-term financial outcomes. Also, how do NPOs that have reserves
manage these resources? Management research examining the policies
and practices of NPOs around these reserve funds might reveal avenues
for improved efficiency or better returns; or, it might find that NPOs are
already managing these pools of funds well. New accounting standards
introduced in the U.S. require increased disclosures on NPO liquidity
and may add to future insights—assuming researchers are able to access
such data.
Given the range of reserves in the sector, additional research might
examine how NPOs manage to muddle through the lean years. Whereas
limited research on reserve substitutes does exist, a better understand
ing of how NPO managers use different tools in their toolkit to work
through hard times would be instructive. Such research might help us
improve contracting relationships between NPOs and governments,
foundations, and even for-profit entities. It might also help us develop
tools or institutions, like organizations that provide short-term loans,
access to credit, or other financial inventions, that might help NPOs dur
ing these lean times.
Notes
1. Although some long-term assets such as stocks and bonds are easy to convert
to cash, Ramirez (2011) notes that managers may not know the precise value
of these assets due to price fluctuations, reducing their utility as short-term
cash management tools. Further, if these asset values fall because of macroeco
nomic conditions, the organization may sell these assets at suboptimal times.
2. The 2015–2017 IRS Masterfile Extracts represent the calendar year in which
the forms were filed and represent multiple tax years, primarily 2014–2016.
The IRS revised Form 990 was phased in over multiple years beginning in the
2008 tax year. The balance sheet information provided on the revised Form
990 differs from the old form, so calculating the operating reserves ratio uses
different fields for each form. We standardize the formula as much as possible
to allow for comparison between the late 1990s using the digitized NCCS data
and the more recent data from the IRS extracts. Importantly, both samples are
limited to 501(c)(3) organizations who filed the long-form 990 (rather than the
Form 990-EZ) in compliance with Statements of Financial Accounting Stand
ards (SFAS) 117 for reporting net assets based on donor restrictions (Bowman,
Tuckman, & Young, 2012). The 1998 to 2000 sample is further limited to
organizations using accrual accounting. We are unable to identify and remove
the organizations not using accrual accounting from the 2015 to 2017 sample
organizations, but leaving the organizations using cash accounting in the 1998
to 2000 sample has little effect on the summary statistics presented here.
3. Margin, or ‘surplus per Form 990,’ is calculated using the revised Form 990
as ‘Total revenue’ (Part VIII, column (A), line 12) less ‘Total expenses’ (Part
IX, column (A), line 25). The margin ratio is found by dividing the margin
by ‘Total revenue.’ For the pre-2008 Form 990, ‘surplus per the Form 990’
is ‘Total revenue’ (Part I, line 12) minus ‘Total expenses’ (Part I, line 17). The
margin ratio divides the surplus by ‘Total revenue.’
4. Based on the revised IRS Form 990, operating reserves consist of ‘Unre
stricted net assets’ (Part X, column (B), line 27) minus ‘Land, buildings, and
equipment less accumulated depreciation’ (Part X, column (B), line 10c) less
long-term debt. Long-term debt consists of ‘Tax-exempt bond liabilities’ (Part
X, column (B), line 20), ‘Secured mortgages and notes payable to unrelated
third parties’ (Part X, column (B), line 23), and ‘Unsecured notes and loans
payable to unrelated third parties’ (Part X, column (B), line 24). The order
of operations matters for the calculation of operating reserves and is as fol
lows: = unrestricted net assets − (land, buildings, equipment − (tax exempt
bonds + secured mortgages + unsecured notes)). The operating reserves ratio
is calculated by dividing the operating reserves by total expenses (Part IX,
column (A), line 25) less depreciation expense (Part IX, column (A), line
22): = operating reserves / (total expenses − depreciation expense). Calculat
ing operating reserves using the pre-2008 Form 990 differs in two ways. First,
fixed assets include both ‘Investments—land, buildings, and equipment’ less
accumulated depreciation (Part IV, line 55c) and ‘Land, buildings, and equip
ment’ less accumulated depreciation (Part IV, line 57c). Second, long-term
debt includes ‘Tax-exempt bond liabilities’ (Part IV, line 64a) and ‘Mortgages
and other notes payable’ (Part IV, line 64b). Excluding tax-exempt bond lia
bilities from the long-term debt in the numerator biases the operating reserves
ratio downward.
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10 Treasury, Cash, and
Liquidity Management in
Nonprofit Organizations
John Zietlow
Introduction
Careful management of an organization’s short-term financial resources,
or cash and treasury management, is critically important for mission
achievement and is the key component of financial health or sustainabil
ity. The time period especially in view here is from today through a year
from now. Nonprofit financial managers focus heavily on this time frame
in managing cash and treasury-related activities. Whether carried out by
the chief financial officer, executive director acting as a chief financial
officer, the board treasurer, the finance director, or a person with the title
of cash manager, the focus is on liquidity, broadly defined. I adopt the
convenient shorthand of labeling all these actors as nonprofit managers,
even though the title and the exact role of the person(s) performing treas
ury functions in the nonprofit may vary. Managers’ cash and treasury
management domain includes four related short-term activities: manag
ing cash, raising external financing, managing the short-term investment
portfolio, and managing risk (Zietlow, Hill, & Maness, 2020). Nonprofit
managers may extend their view beyond the one-year horizon, especially
as they assess their organizations’ financial health (Zietlow, 2012) and
engage in capital budgeting and long-range financial planning for antici
pated capital expansion and related funding needs. Cash management
principles apply whether an organization is a business or a nonprofit
organization (NPO); any organization may be viewed as a cash flow sys
tem (Zietlow & Chisholm, 1988). Cash and cash flow are critical for any
organization to function. Managerial inattention to cash in (NPOs) is
especially problematic, as detailed in this chapter.
Mission achievement is enhanced by astute cash and treasury man
agement. Inadequate liquidity emanating from improper cash and treas
ury management limits programs from being carried out. Consequently,
managers should 1) bring the cash in quickly; 2) slow the payout of cash,
within ethical constraints; 3) make sure cash is in one or a very few loca
tions and is accessible; and 4) manage the risks of cash and cash flow.
I take the premise that nonprofit managers quickly become aware of
the importance of liquidity management as they experience a cash flow
130 Zietlow
crunch—a temporary imbalance—or a cash flow crisis due to a struc
tural, ongoing shortfall of cash inflows relative to cash outflows. Many
NPOs encountered either a cash crunch or cash crisis during and after the
2008–2009 financial crisis, yielding a heightened value to liquidity due to
the credit constraints and revenue stream compression during this period
of financial stringency. Once aware, the nonprofit manager’s major chal
lenge is to define, measure properly, and monitor a comprehensive liquid
ity construct. I address how cash and treasury management in an NPO is
tied to the organization’s primary financial objective. Nonprofit manag
ers are also goal-driven, implicitly or explicitly guiding their organiza
tions toward financial health and sustainability, a point often missed in
the academic literature.
The remainder of this chapter is laid out as follows. First, I will briefly
review the academic literature in the business-sector field as it is more
advanced and yields actionable findings. I then profile survey and field
research evidence available on the espoused primary financial objective
pursued by NPOs and profile the literature on nonprofit cash and treasury
management. I provide a new look at the constructs that enable the non
profit to achieve that primary financial objective. Building on this book’s
previous chapter, I suggest ways in which nonprofit financial managers
may measure and manage liquidity, including liquid reserves, to better
achieve their missions. Managers successfully navigating this challenge
are then equipped with a potent toolkit for addressing financial health
and sustainability. I close the chapter with a call for further research.
Literature Review
Introduction
Cash and treasury management have been addressed in much greater
detail for businesses in both the academic and practitioner bodies of
knowledge. The organizing construct for cash and treasury management
is liquidity management.
Business Sector Contributions

I begin our survey of the business sector literature by citing a representa
tive textbook practitioner guide. I then selectively draw from academic
journal contributions.
Textbook/Practitioner Book Treatment

The purpose of cash and treasury management is to assure adequate liquid
ity (Zietlow, Hill, and Maness, 2019). Reduced organizational liquidity
(i.e., illiquidity) may result in the reduced provision of services, a higher
Treasury, Cash, and Liquidity Management 131
cost of capital, and reduced capital investment. Chorafas (2002) argues
that liquidity management aims to reduce the probability of an irreversible
adverse situation and its aftermath.
Academic Journals
In this review of academic journals addressing liquidity in the corporate/
business sector, I have selected items that could have broad application to
all NPOs. These focus on motives for holding liquidity, when an organi
zation’s liquidity might be deemed ‘excessive’ rather than ‘enough,’ and
why managers should focus their attention on cash flows, rather than
accrual revenues, expenses, and profit.
Ang (1991) argues that the issue of corporate slack might be consid
ered as one of the great controversies in corporate finance. He defines
corporate slack as “a firm’s excess holding of liquid assets, or claims,
and options to liquid assets, above what it needs for the normal opera
tion of its existing business.” Morris (1991) notes a great deal of dif
ficulty determining where to draw the line between a necessary cushion
and slack. Morris (1991) also suggests that any argument for an optimal
level of slack represents a contradiction in terms, because if the firm has
slack, but it is considered to be less than optimal and it obviously needs
more—it would not then be appropriate to label it slack. Not surpris
ingly, business (or nonprofit) treasury managers do not employ the con
cept of slack. Morris (1991) properly reorients the viewpoint to be the
holding of liquid assets, which may help the firm to meet its obligations
and allow it to survive a difficult period.
Cash holdings are most closely linked empirically to the transactions
motive and the precautionary motive for holding cash. Kim, Mauer, and
Sherman (1998) and Opler, Pinkowitz, Stulz, and Williamson (1999)
examined the determinants of corporate cash holdings for United States-
based firms over several decades and find that cash holdings vary directly
with financial constraints, the cost of external financing, cash flow vola
tility (or business risk), and growth opportunities. Of special interest to
NPOs, cash policies varied significantly by industry. Firms that are most
likely to benefit from cash holdings accumulate greater levels of internal
liquidity. Graham and Leary (2018) studied the large increase in cash
balances held by publicly-held businesses in the U.S. in recent years and
find that riskier companies with growth opportunities, small or nonex
istent profits, and little use of debt have high cash-to-assets ratios. They
surmise that financial managers determine the amount of cash to hold
by considering three items: 1) the projected amount of cash coming in
within the upcoming year; 2) the amount of the investment the company
expects to make in the upcoming year; and 3) how much in funds the firm
can raise quickly and with limited costs. Notice that each of these involve
forecasting an amount for the upcoming period, as opposed to analyzing
132 Zietlow
static indicators such as the current ratio or liquid unrestricted net assets
relative to expenses.
Financial constraints, particularly applicable to NPOs that are not able
to issue stock and that are too small or young to tap the debt market,
have been studied extensively in the business sector. Harford, Klasa, and
Maxwell (2014) find that companies cope with refinancing risk by hold
ing more cash and saving cash from cash flows. Both long-term debt and
bank debt is now shorter-maturity than it has been in previous decades,
implying that refinancing risk is a concern. Companies have met this
increased refinancing risk by significantly increasing their cash holdings.
Lopez-Gracia and Sogorb-Mira (2015) studied Spanish companies and
find that financially constrained firms save significant amounts of cash
out of their cash flow whereas those able to tap the equity market do not.
The authors note that by doing so, these companies are sacrificing cur
rent investments to safeguard potential future investment opportunities.
The ‘speculative motive’ for holding liquidity also finds support in
numerous studies. Simutin (2010) finds that high ‘excess cash compa
nies’ (those holding more cash than one might anticipate based on logical
predictors) invest considerably more in the future then do peers holding
‘low cash’—indicating that companies accumulate cash as they antici
pate future investment opportunities in the presence of costly external
financing. They have or are acquiring growth options, and during eco
nomic expansions, these companies will use the cash to take advantage of
investment opportunities and exercise their growth options. He also finds
that high cash flow firms tend to save a smaller fraction of their cash flow
but also tend to hold a higher fraction of assets as cash.
The external economic environment and managers’ perceptions of
how that might change in the future also affect cash holdings. Neam
tiu, Shroff, White, and Williams (2014) studied the impact of economic
uncertainty on cash holdings in companies. Even when controlling for
real GDP growth and company earnings volatility, lagged cash holdings,
and financing constraints, they find that companies reduced their capital
investment and held higher levels of cash in the face of ambiguity and
the inability to confidently project investment-related future cash flows.
Bringing near-cash substitutes and short-term borrowing into the
analysis further underscores the need for a cash forecast in determining
cash holdings. Boileau and Moyen (2016) find that lower interest rates
and companies’ volatility in selling, general, and administrative expenses
(mostly unrelated to operations scale) have led to higher cash holdings.
Their higher liquidity needs have forced companies to hold more cash
and use more credit lines. Lins, Servaes, and Tufano (2010) find that the
strongest factor that influences present-day cash policies is to buffer against
future cash flow shortfalls and that credit lines are used to hedge against a
different risk than holding non-operational cash. Credit lines provide com
panies with an option to exploit future business opportunities that become
available in good economic times. Non-operational cash, on the other
hand, protects against future cash flow shocks that might occur in bad
times. They also find that credit lines are the dominant source of liquidity
for companies around the world, as their survey spanning 29 countries
finds that credit lines amount to roughly 15% of assets. Cash held by com
panies for non-operational purposes comprises only about 2% of assets.
Companies follow a very different liquidity sourcing than what we see in
nonprofit asset and capital structures, motivating the inclusion of short-
term financing availability into our liquidity measurement and analysis.
Synthesis—For-Profit
To summarize the business sector findings regarding cash and liquidity,
organizations start their determination of how much cash to hold by assess
ing their transactions need for cash. The transactions demand for cash
applies equally to NPOs. A thrift store needs coin and currency to make
change. Other than all-volunteer organizations, NPOs hold money in their
checking accounts to meet payroll and to buy supplies. The degree to which
cash inflows and cash outflows are not synchronized will result in larger
transactions balances being held or in a credit line being established or
increased in amount. Businesses and NPOs have a precautionary demand
for cash as well—the proverbial ‘money for a rainy day,’ emergency fund, or
operating reserve. Cash held allows the organization to hedge itself against
an unexpected drop in revenues and support, an unexpected increase in
expenses, or an unexpected inability to borrow. On the revenue and sup
port side, reduced future operating cash flows may arise from broad eco
nomic downturns or firm-specific events such as losing a major customer.
The availability of short-term investments not classified as cash equivalents,
untapped credit lines, and significant positive operating cash flows are all
factors that allow an organization to hold less cash as a precaution. The
speculative demand for cash relates to cash held to quickly invest in finan
cially attractive capital investments when they become available.
Starting Point for Management and Board: What Is an NPO’s

Primary Financial Objective?
The importance of cash and treasury management is linked to the non
profit manager’s primary financial objective, as noted earlier. Although
academics focus more on profits, surpluses, or changes in net assets, man
agers see these as a means to an end rather than the primary objective.
What the Primary Financial Objective Is Not

An NPO’s primary financial objective is not simply to break even finan
cially, meaning that revenues and support are exactly equal to expenses
134 Zietlow
for the period. Even if it breaks even, the organization has no assurance
that cash inflows from operations equal or exceed cash outflows from
operations, nor does breaking even provide needed funds for growth,
emergency needs, acquisitions, building an endowment, self-financing a
building, or other needs.
Earning a surplus, or ‘profit,’ will not suffice, either. Whereas prefer
able to breaking even, the same indictments just mentioned for breaking
even apply to small surpluses as well. Being ‘in the black’ on the operat
ing budget may occur when positions went unfilled, or supplies went
unordered and the organization cut back its mission-related activities to
achieve this end. Furthermore, pursuing this objective may lead to selling
investments at inopportune times, taking on debt due to a cash crunch or
cash crisis, or having to do emergency fundraisers. There is much confu
sion in the field because most academics, board members, and consult
ants have focused too heavily on operating budget outcomes, ‘profits,’
and changes in net assets as financial objectives. For example, some
observers confuse cash holdings or reserves with profits, not understand
ing that all assets are funded by either liabilities or net assets (only the
latter are accumulated profits). Financial managers prefer to see surpluses
as a means to an end (see survey evidence below), focusing more heavily
on changes in the cash position, short-term investments, short-term debt,
and incoming cash flows. Should one choose to focus on a single financial
statement or report, that statement should be the statement of cash flows,
not the statement of activities (or worse, the operating budget). Under
standing changes that have occurred in the past allows the financial man
ager to engage in the all-important task of projecting future cash flows.
This book’s previous chapter defines slack resources as excess, rela
tively liquid, and available funds that managers may inexpensively tap
when needed for cyclical or emergency needs or for strategic reasons
related to opportunities and service growth. Cash and treasury managers
view liquidity more broadly as cash, cash flows, borrowing facilities, and
other potential funding sources needed for transactions and intra-year
cash receipt and disbursement mismatches as well as the items embedded
in the concept of slack resources. The primary means of managing and
controlling liquidity is to prepare and use a cash budget/forecast, and
the timing of cash flows might be more critical than the total amounts
of inflows and outflows (Gallinger & Healey, 1987). Encouraging evi
dence that many NPOs make cash projections is found in Marwell and
Calabrese (2015), who find that 78% of the 79 New York Human Ser
vices nonprofit managers they surveyed prepare a cash forecast. Financial
ratios do not provide the necessary information regarding within-period
cash flows, past or present, nor do they provide insight into the pattern
of future cash flows (Gallinger & Healey, 1987). Projecting cash inflows
and outflows, and the resulting cash position, may be done daily for the
next week, weekly for the next month, and monthly for the next year
in order to assure the manager that cash outflows are matched by cash
inflows, cash holdings, short-term investments, or draws on a credit line
(Gallinger & Healey, 1987). Financial flexibility, not part of the notion
of slack, is valued by nonprofit managers.
The Primary Financial Objective Is an Appropriate

Liquidity Target
The first reference to the NPO’s primary financial objective being an
appropriate liquidity target came from a grounded theory multi-method
study conducted 25 years ago (Hankin, Seidner, & Zietlow, 1998; Ziet
low, 1994, 1997). The primary financial objective descriptive of non
profit financial management behavior was labeled a ‘liquidity target.’ It
appears that organizations strive to maintain, within some range they
are comfortable with, a certain amount of liquidity. The target is man
aged intertemporally, meaning that the liquidity may dip below or range
above the targeted range in any given year, but the organization will
attempt to return the level of liquidity to the prescribed range in the fol
lowing year(s).
A more recent and wider-scale study of 514 mid-sized NPOs in 2011
was conducted by researchers at Indiana University (Center on Phi
lanthropy, 2012). The survey encompassed NPOs of all types, not just
donatives. The Indiana University survey finds that “striving to meet an
appropriate liquidity target over time—that is, maintaining a targeted
level of cash reserves and financial flexibility” (37.6%) and “assuring an
annual surplus so the mission can be achieved in down years (26.6%)—
are the primary financial objectives selected by most organizations”
(Center on Philanthropy, 2012, p. 7). Note the second objective presumes
that the surplus is saved up for a period of one or more years, embodying
the precautionary motive for holding cash and underscoring the objective
of liquidity targeting (which, in turn, guides how much of a surplus to
strive for). An additional 23.7% reported that breaking even financially
was the primary financial objective for the organization.
The reader may reference the previous chapter for studies of nonprofit
operating reserves. It is not clear whether reserves include transactions
demand for cash, particularly when part of a survey. The most careful
study of actual nonprofit liquidity management practices to date was
conducted by Ramirez (2011). Ramirez (2011) harnessed the methodol
ogy used by the finest corporate finance research and applied it to NPOs.
He studied cash as well as cash as a percentage of yearly expenses. His
primary findings of interest include:
• NPOs hold three months of annual expenses in cash and another

nine months of expenses in savings (interest-bearing account bal
ances and short-term investments).
136 Zietlow
• NPOs hold cash for the same reasons as businesses: 1) the transaction
motive (it is the least expensive way to finance daily operations); 2)
the precautionary motive (as a buffer against unpredictable declines in
revenue and support); 3) the speculative motive (to take advantage of
future investment opportunities, which may also be unanticipated); and
4) governance-related reasons (this may play out in one of two ways—
the board and management superintend liquidity correctly and for good
reasons or the board and management hold too little or too much liquid
ity to gain personally or stand in the way of donors’ and other funders’
best interests from being carried out). Smaller NPOs, those with riskier
(less predictable) revenues and support, and those with higher surpluses
(surpluses divided by expenses; some of these surpluses, presumably,
accumulate in the form of cash over time), tend to hold more cash.
• Organizations that appear to hold ‘excess cash’ will then invest more in
land, buildings, and equipment than similar organizations holding nor
mal levels of cash. This use of cash to fund asset growth underscores the
need to prefund growth by building up liquidity. These amounts serve
as ‘strategic reserves’ (Zietlow, Hankin, Seidner, and O’Brien, 2018).
• Organizations holding a higher level of liquid longer-term invest
ments (public securities, including stocks and bonds), those that are
easily and quickly sold for their fair market value, tend to hold less
cash, which suggests that managers are aware of and manage substi
tutes for cash wisely. Sloan, Charles, and Kim (2016) provide empiri
cal support from survey evidence that arranging cash substitutes such
as credit lines is intentional.
• Donors do not penalize organizations that hold high levels of cash.
They evidently do not see governance/agency problems that might
result in too-high liquidity levels.
Ramirez (2011, p. 664) hypothesizes that the uniqueness of NPOs

implies that high cash levels could be seen as prudent management—“a
precautionary cushion, agility for transactional purposes, and flexibility
for speculative purposes—instead of an indication of agency problems.”
He concludes (p. 675): “It appears that cash holdings in the nonprofit
sector, like their for-profit counterparts, can be largely explained by pre
cautionary and speculative measures. . . . Cash is very valuable for the
organization, and donors seem to agree.”
Recapping, the NPO’s primary financial objective is to ensure that finan
cial resources are available when needed (timing), as needed (amount),
and at reasonable cost (cost-effectiveness), and that once mobilized, these
resources are protected from impairment and spent according to mission
and donor purposes. The first and main part of this objective implies that
the organization sets and manages an appropriate liquidity target.
How might an NPO set its adequate liquidity target? From our litera
ture review, we surmise that it might assess qualitative factors such as its
age and size, its industry, and its revenue mix as well as other business
model factors. It might also engage a quantitative approach, assessing
such factors as the volatility of its cash flows, growth, future economic
conditions (especially credit conditions), market structure (Paarlberg,
An, Nesbit, Christensen, & Bullock, 2018), as well as other items implicit
in the new liquidity assessment required by the new accounting stand
ards update in the U.S., ASU 2016–14. The remainder of this chapter
introduces a new liquidity management measurement framework that
addresses the relevant dimensions of liquidity and the empirical findings
just summarized.
Desiderata—Measure and Manage Liquidity, Broadly

Defined
Some Definitions
Nonprofit managers properly set their organizations’ appropriate liquid
ity target by incorporating elements of solvency, liquidity, and financial
flexibility. My starting point is solvency—the least helpful component,
and yet the one that gets the most attention in academic discussions of
liquidity. The only part of solvency that is truly liquid is cash. I build
on the cash position by incorporating cash flow measures that repre
sent liquidity coming into the organization. I then introduce items that
are often off-balance sheet and perhaps invisible to the outside observer,
which comprise financial flexibility. Together these provide the manager
with the necessary ingredients for a composite view of liquidity that
might serve as the liquidity target.
What Is Solvency?
Solvency is an accounting concept. If the book value of assets exceeds
that of liabilities, then the organization is considered solvent because the
potential cash proceeds from the sale of assets can be used to repay liabil
ities. Alternatively, the firm is considered insolvent if liabilities exceed the
book value of assets. For clarity, we further divide solvency into short-
term solvency and long-term solvency.
Short-term solvency measures include net working capital, the current
ratio, net assets, and liquid unrestricted net assets. These point-in-time
measures are limited in terms of providing adequate insight into organi
zational liquidity. Furthermore, the longer the time elapsing between
the measurement of stocks, the greater the need to augment with liquid
ity measures. When the manager measures statement of financial posi
tion items only once a year or once a quarter, neither levels nor changes
in levels will appropriately measure related cash flows. Furthermore,
the time-to-cash dimension is not captured in these ratios regardless
138 Zietlow
of how often they are recalculated. Payables may come due and drain
cash before receivables are collected. Because of these deficiencies, the
best way to incorporate solvency is through a basic measure such as
the sum of cash and short-term investments readily convertible to cash
(to scale cash, one might calculate the modified cash ratio (net cash/
assets), where net cash is defined as cash minus accounts payable minus
accrued expenses; Zietlow, 2012). The manager should not set the
organization’s liquidity target solely based on one or a set of solvency
measures.
Long-term solvency measures include the debt-to-assets ratio and the
coverage of debt-related payments. The primary insights from these are
to gain a deeper understanding of financial flexibility, discussed later.
What Is Liquidity?
Liquidity is the “ability to meet current and future financial obligations
in a cost-effective manner. . . . By definition, cash is completely liquid”
(Association for Financial Professionals, 2013). We have seen how the
manager may use cash, by itself or along with short-term investments
readily convertible to cash, as the preferred solvency measure. A liquidity
measure focuses on the flow of cash with respect to its amount, timing,
or riskiness. The cash reserve ratio, calculated by dividing cash by total
expenses, could serve as a liquidity measure if accrual-based expenses
were reformulated into cash expenses (at a minimum, subtract deprecia
tion and amortization expense, in-kind expense, pass-through expenses,
and one-time expenses; Barr, 2019)—which is rarely done, unless cash-
basis accounting is used. A key business metric used is the cash con
version cycle, the number of days that it typically takes to move funds
from inventory to receivables and from receivables to cash, after account
ing for deferred payment from payables. When an organization’s cash
conversion cycle is short, it takes less time to generate cash, indicating
improved liquidity. Organizations plagued with irreducible and long cash
conversion cycles wait longer to receive cash inflows and must, therefore,
arrange for longer periods of gap financing as they exhaust their cash and
short-term investments holdings or tap a credit line. Rather than rely on
historical conversion cycle data, the nonprofit manager is best advised to
project the cash inflows and cash outflows expected over the next week,
month, quarter, and year. Correspondingly some experts argue that the
single most important component of liquidity management is forecasting
cash (Gallinger & Healey, 1987).
What Is Financial Flexibility?

An organization possesses financial flexibility when its financial policies
(use of debt, excess of revenues over expenses, and the relationship of
revenues to assets) are consistent with its projected increase in revenues
(Zietlow, Hankin, Seidner, & O’Brien, 2018). The business model of the
organization sets the parameters for its financial flexibility. The Financial
Accounting Standards Board (FASB, 1993) defines financial flexibility
operationally, with a focus on unanticipated fundings needs. In particular,
Financial flexibility is the ability of an entity to take effective actions

to alter amounts and timing of cash flows so it can respond to unex
pected needs and opportunities. Information about the nature and
amount of restrictions imposed by donors on the use of contributed
assets, including their potential effects on specific assets and on lia
bilities or classes of net assets, is helpful in assessing the financial
flexibility of a not-for-profit organization.
(Financial Accounting Standards Board, 1993, p. 69)
We underscore the focus on the amounts and timing of cash flows here.
Peter Kramer, of the Nonprofit Finance Fund, alludes to financial flex
ibility in his definition of financial sustainability as the “organization’s
ability to manage the unexpected, adapt to changing circumstances, and
pursue mission imperatives” (Kramer, 2018).
How can this be translated into an operational measure? First, a full
view of financial flexibility includes the willingness of board members to
meet emergency needs by making above-normal donations or loans to the
organizations. Second, finance staff need visibility into financial informa
tion such as restrictions on the use of assets, the compensating balances
that must be maintained in checking accounts as banks require, the matu
rity structure of long-term assets and liabilities, or the designated amounts
within unrestricted cash and short-term investments (Zietlow, Hankin,
Seidner, and O’Brien, 2018).
Combining one or more solvency measures, a measure of liquidity, and
a measure of financial flexibility gives the nonprofit manager the ability
to manage an organization’s liquidity comprehensively. Rather than sepa
rately identify the measures as solvency, liquidity, and financial flexibility,
the necessary elements will be reframed as CORE-1, CORE-2, CORE-3,
and augmented liquidity.
A New Liquidity Management Approach for NPOs
Viewed Broadly
Liquidity management, in essence, is aimed at ensuring an organization’s
financial health and sustainability. In line with Kramer’s (2018) defini
tion of financial sustainability (mentioned earlier), managers will want to
employ an appropriate liquidity target that ensures their organizations’
financial health and sustainability.
140 Zietlow
Table 10.1 portrays a new look at liquidity that any nonprofit manager
might apply. It addresses some of the shortcomings of existing liquidity
and solvency measures by incorporating key components of liquidity and
financial flexibility and by replacing solvency components (current asset
and liability balance sheet items beyond cash and short-term investments)
with forecasts of cash flows that will alter the future cash position.
In Table 10.1, liquidity for the nonprofit treasurer or cash
manager—a liquidity composite which I shall call LiquidityTreasury—has
several components. Here are the primary components of liquidity
Table 10.1 Liquidity Broadly Defined—A Recommended Measure of Liquidity

for Nonprofit Managers
Level Description and Calculation Formula
CORE-1 “Core 1.Cash (Unrestricted and Undesignated).*

of the Core” Formula:
Cash (unrestricted and undesignated) = (Cash and cash
equivalents − Temporarily restricted cash and cash
equivalents − Any designated amounts within cash and
cash equivalents)**
CORE-2 “Other 2.Adjusted Liquid Reserve.
liquidity resources” a. Include all other cash beyond Item #1 that is not
permanently restricted, unless in quasi-endowment.
b.Include all short-term investments that are not
permanently restricted, unless in quasi-endowment.
c. Include the unused portion of an arranged credit line.
d.Exclude current maturities of mortgage or other long
term debt.
e. Exclude current short-term borrowing amounts
beyond any credit line outstanding.
f. Exclude current portion of leases.
Formula:
Other liquidity resources = (Unrestricted and temporarily
restricted cash and equivalents + Short-term investments
(unless permanently restricted) + Unused credit line −
(Current maturities of long-term debt or leases + Other non-
credit-line short-term debt such as notes payable) − Item #1
above)
CORE-3 “Net 3.Expected Operating Cash Flow.
incoming cash a. Include all incoming operating cash expected in the
from operations” next period (typically one year).
b.Exclude all outgoing operating cash anticipated in the
next period (typically one year).
Formula:
Expected operating cash flow = Incoming operating cash
flow − Outgoing operating cash flow
Estimation of expected operating cash flow if nonprofit
manager:
This would be the same as the projected operating cash
flow in a period-ahead projected statement of cash
flows.
Level Description and Calculation Formula
Estimation of expected operating cash flow (OCF) if

outside analyst:
Proxy for expected operating cash flow = Average of
last three years’ OCF
Possible subjective ad-hoc adjustments to this proxy for
outside analyst:
One might make an upward adjustment if one or more
of these cases hold:
a. Adjust for low recent range (last three years’
average OCF ≤ 50% of average multi-year OCF).
b.Adjust for high operating performance (last three
years’ experienced positive net surplus each year).
c. Adjust for high cash yield (average OCF for last
three years ≥ 0.75 of three-year average surplus).
One might make a downward adjustment if one or
more of these cases holds:
a. Adjust for high recent range (last three years’
average OCF > 200% of historical multi-year
average OCF).
b. Adjust for low operating performance (last three
years’ experienced net deficit each year).
c. Adjust for low cash yield (average OCF for last
three years ≤ 0.25 of three-year average surplus).
Augmented 4.Financial Flexibility.
liquidity a. Include amounts in quasi-endowment that are not
specifically encumbered by cash commitments due
within one year.
b.Include an unused portion of arranged credit line.
c. If no credit line exists, use a proxy for likely line
approval amount:
i. Include 50% of the organization’s inventories.
ii.Include 75% of the organization’s accounts
receivable.
d.Include written donor or foundation emergency
funding declaration.
e. Include parent organization guarantee.
f. Include nonfinancial assets awaiting sale
(conservative market valuation) as well as long
term unrestricted financial assets awaiting sale
(conservative market valuation).
g. Include other known factors, if relevant (such
as the ability to issue an added 25% beyond the
existing commercial paper outstanding, if any, or
the ability of an emergency fundraising appeal to
bring in $X).
Liquidity composite LiquidityTreasury = CORE-1 + CORE-2 + CORE-3 +
Augmented liquidity.
- Assess adequacy of LiquidityTreasury by calculating a
supplemental measure, Target liquidity level lambda.***
(Continued)
142 Zietlow
*
An outside analyst may not have this specific information so may have to use cash and
cash equivalents from the statement of financial position.
**
Assumes that cash and cash equivalents, as shown at the top of the statement of financial
position, does not include any permanently restricted cash.
***
Target liquidity level lambda may be calculated as (Liquid reserve + Incoming oper
ating cash flow) / Uncertainty of operating cash flows. Liquid reserve is the sum of
cash and cash equivalents, short-term investments, and the unused portion of the credit
line. In this formulation, it equals CORE-1 + CORE-2. Incoming operating cash flow
is CORE-3 here. This item is now the first item to be shown under header “Table 10.1
(Continued).” Uncertainty of operating cash flows may be calculated as the standard
deviation of historical operating cash flows. The lambda measure, also called the “rela
tive liquidity index,” is interpreted as a standard normal score and allows for a calcu
lation of the probability running out of cash (Zietlow, Hankin, Seidner, and O’Brien,
2018). The manager might calculate target lambdas for two different time horizons: a
period covering the next three months (using a three-month projection of operating cash
flows and uncertainty calculated on past quarters of operating cash flows) and a period
covering the upcoming year (using a year-ahead projection of operating cash flows and
uncertainty calculated on past annual values of operating cash flows). Scenario analysis
would also provide helpful insights here.
that may be built up, measured, and managed. I suggest the following
three elements of core liquidity and one element of augmented liquid
ity. I label the Level 1 measure as CORE-1 (“Core of the Core,” as
this is the only amount that could be spent at a moment’s notice), the
Level 2 measure as CORE-2 (other liquidity resources), and the Level 3
measure as CORE-3 (net incoming cash from operations). All of these
are measurable and manageable for managers and the board. Outsid
ers may calculate some of these directly and derive proximate meas
ures of several others but would have difficulty estimating all but the
first three components of financial flexibility. Nonprofit managers can
assess their organizations’ liquidity composite by calculating the target
liquidity level lambda (also called relative liquidity index and lambda),
based on the sum of the three elements of core liquidity (CORE-1 +
CORE-2 + CORE-3), as informed by augmented liquidity. If the sum
of the three elements of core liquidity appears insufficient, managers
determine if augmented liquidity (financial flexibility) is ample. If not,
they may determine whether and how to build augmented liquidity,
perhaps through having several major donors establish a formal back
up liquidity donation letter of intention. If augmented liquidity is not
and will not be sufficient, managers may review and manage the three
core liquidity elements, perhaps deciding to contract for or request an
increased amount for a line of credit.
Call for Additional Research

One might suggest three directions for further research. First, the com
posite liquidity tool offered here can be refined and improved. Second,
insights from the closely related and developing field of risk management
should be integrated with our understanding of cash and liquidity man
agement. Researchers might also add value for managers by moving
away from financial vulnerability as a binary measure (vulnerable-not
vulnerable) to a continuum of financial health. An initial contribution in
this direction with gradations of vulnerability (highly or not highly vul
nerable) and with short-term and long-term factors is made by Andres-
Alonso, Garcia-Rodriguez, and Romero-Merino (2016).
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11 Capital Structure and
Financial Health
Marcus Lam, Elizabeth Searing, Christopher
Prentice, and Nathan Grasse1
Introduction
The simplicity with which capital structure may be defined—that is the
relative mix of an organization’s assets and liabilities—calls into ques
tion the complexity and importance of the concept in regard to non
profit operations and survival. More than just an accounting exercise,
concerned with tracking “the distribution, nature, and magnitude of an
organization’s assets, liabilities, and net assets” (Miller, 2003, p. 1), the
capital structure of an NPO dictates how successful it will be in achiev
ing its mission. A suboptimal capital structure, where an NPO has an
unbalanced proportion of debt to equity, increases the cost of capital
and decreases financial health (Andres-Alonso, Garcia-Rodriguez, &
Romero-Merino, 2016; Jegers, 2018; Lin & Wang, 2016; Miller, 2003;
Trussel, 2002, 2012; Wedig, Hassan, & Morrisey, 1996).
The amount and sources of debt that a nonprofit organization (NPO)
uses to finance its projects and programs is a critical management issue
(Trussel, 2012). Nonprofit practitioners would benefit from a more pro
found insight into the capital structure decisions they have to make, and
the possible consequences that those decisions may have for organiza
tional operations and financial health (Jegers, 2018). As Bowman, Cala
brese, and Searing (2018) note, capital structure should not be considered
in isolation. Just as a balance sheet should be viewed alongside an income
statement, capital structure must be considered alongside the current
business operations and future operational goals of an NPO (Bowman
et al., 2018; Miller, 2003). After all, nonprofit operations—documented
in the income statement—are financed by resources in the balance sheet.
Jegers (2018) argues that much more theoretical and empirical
research is needed to understand nonprofit capital structure, and he spe
cifically calls for replication studies in different countries. In response
to Jegers’s (2018) call, this empirical research analyzes the capital struc
ture of Canadian charities with panel data over an eight-year period and
seeks to contribute to a greater understanding of how NPOs finance their
operations. Specifically, we explore whether Canadian charities finance
146 Lam, Searing, Prentice, and Grasse
operations by using net assets or leverage their assets and pursue financ
ing by issuing debt.
The chapter begins with a brief review of the ‘uniqueness of nonprofit
finance’ (Bowman, 2002). In this section we discuss the structural, legal,
and normative elements that make borrowing decisions in NPOs different
than in for-profit organizations. Next, we present the two dominant com
peting theories of capital structures—pecking order and static trade-off—
and offer a literature review of studies that examine the capital structure
of NPOs. The following sections offer a brief discussion of the Canadian
nonprofit sector for context and a review of our methodology, including
the operationalization of our variables and the analysis procedure. We
then present the results of our analysis and conclude with a discussion of
the implications of our findings for future research.
Capital Structure: The Nonprofit Difference

Much of what we know about capital structures emerges from the cor
porate finance literature, building upon influential works by Donaldson
(1961), Fama and Jensen (1985), Jensen and Meckling (1976), Miller
and Modigliani (1961), and others (see surveys by Harris & Raviv, 1991;
Zingales, 2000). Some observers suggest that NPOs may not approach
capital structure and debt decisions differently than for-profits (Brody,
1996; Trussel, 2012). They argue that in certain service areas (e.g., health
care) NPOs and for-profits face similar challenges when deciding how to
finance operations. In their view, business operations and institutional
isomorphism are more influential than legal status and tax benefits in
deciding whether and how much to borrow. Indeed, Trussel’s (2012)
results support this theory of institutional convergence on capital struc
ture. Although this argument regarding the similarity in capital structures
between NPOs and for-profits operating in the same space is compelling,
it is unlikely that the majority of NPOs operating in uniquely charitable
domains approach debt similarly.
Bowman (2002) offers that four legal distinctions between nonprofit
and for-profit firms are relevant to financing behavior. First, NPOs do not
have owners and thus cannot issue stock or engage in equity financing.
Second, incentives in the tax code allow NPOs to raise money via dona
tions. Relatedly, however, these donations may come with donor restric
tions and may not be used for financing certain operations. Third, NPOs
are not subject to involuntary bankruptcy and cannot be legally forced
into liquidation or reorganization. The consequence of this protection is
a certain insulation from creditors for nonprofit firms. Finally, unlike for-
profit organizations, many NPOs are eligible to sell tax-exempt bonds.
According to Calabrese and Ely (2016), the importance of tax-exempt
borrowing to the nonprofit sector has grown significantly over time, with
an 8% compound annual growth rate in their use from 1993 to 2010.
Capital Structure and Financial Health 147
Nonprofit Debt: To Borrow, or Not To Borrow?
“Borrowing money—whether short-term (in the form of trade credits,
notes, etc.) or long-term (in the form of mortgages, bonds, etc.)—is nei
ther inherently a good nor a bad decision for any organization” (Mitch
ell & Calabrese, 2019, p. 655). And yet, normative and legal boundaries
disincentivize nonprofit borrowing. To some stakeholders, nonprofit debt
service represents an unacceptable diversion of resources away from cur
rent programs, calling into question the organization’s legitimacy. Char
ity Navigator—an online ‘evaluator’ that rates NPOs across various
financial criteria to produce a rank-ordered list of the ‘most responsible’
organizations—uses as a key component to their ratings whether an NPO
has a high level of liabilities relative to assets. To obtain their highest rat
ing, NPOs must maintain a ratio as low as 5% in some service domains
(e.g., animal welfare, food banks, libraries).
Whether Charity Navigator or other online information intermediar
ies influence nonprofit stakeholders is not clear, but the research sug
gests their preference for lower levels of indebtedness is mirrored by
donors. Prior research indicates that organizations with higher levels
of debt service receive lower levels of donations (Calabrese & Grizzle,
2012; Charles, 2018). Mitchell and Calabrese (2019) refer to the widely
accepted notion that NPOs should avoid debt as one of four enduring
proverbs of nonprofit financial management. In addition to the norma
tive bias against nonprofit debt, legal and policy implications exist in
the U.S. context. “When elite universities issued significant debt during
the 1980s, public policy limited debt issuances for the entire sector from
1987 to 1997” (Mitchell & Calabrese, 2019, p. 655).
Despite these normative and legal boundaries, debt has several poten
tial advantages for NPOs. Resource acquisition, in any form, comes at
a cost. Individual donor development, grant writing, capital campaigns,
etc. require significant investment in time and human capital and yield
uneven returns. “Debt can capitalize an organization relatively quickly
and at a relatively low cost” (Mitchell & Calabrese, 2019, p. 655), and
such capitalization can support programmatic expansion, fund new
programs, deliver capital investment to initiate growth, and provide
unrestricted cash reserves (Bowman, 2002; Jegers, 2003; Mitchell &
Calabrese, 2019). Cash reserves are particularly useful to organizations
that contract with government, which is often slow to provide reimburse
ment (Pettijohn & Boris, 2013), and thus are subject to uneven revenue
flows. Debt capacity also “represents an important (if imperfect) vehicle
for maintaining program continuity during economic downturns. Mak
ing recourse to debt, rather than to spending cuts, can help organizations
reduce staff turnover, maintain program capacity and scale, and cope
with other sectoral norms that limit access to other forms of fiscal slack”
(Mitchell & Calabrese, 2019, p. 655).
Thus, NPOs face competing challenges in whether to pursue exter
nal financing, and may prefer to exhaust internal financing before issu
ing debt given normative and legal pressures. In the next section, we
turn explicitly to this question and present the two dominant theories of
capital structures: pecking order and static trade-off. We briefly review
empirical studies that test these theories in the nonprofit context, discuss
the mixed results emerging from these studies, and propose our model for
examining the capital structure of Canadian NPOs.
Literature Review
We follow nonprofit finance researchers such as Bowman (2002) and
Garcia-Rodriguez and Jegers (2017) in defining capital structure as the
combination of debt and equity that allows for the financing of an organ
ization’s operations or growth. On the practitioner side, capital structure
is defined in a similar way but with a focus on organizational assets,
i.e., cash, investments, receivables, buildings and equipment, etc. (Miller,
2003). NPOs may use their capital structure for a number of reasons: to
smooth out cash flow due to delays in third-party payer reimbursements;
expand services by hiring new staff; invest in new programs; or make
capital purchases such as equipment, land, or a building. The decision
about how to finance operational or growth activities is at the crux of
nonprofit capital structure research. In short, NPOs can either use exist
ing reserves (aka net assets or equity) or leverage their assets and borrow,
thus incurring more debt, to finance these activities. More formally, the
two major competing theories about nonprofit financing behavior are
‘pecking order’ and ‘static trade-off.’
The ‘pecking order’ theory posits that nonprofit managers are debt
averse and thus prefer to use net assets or reserves to finance new
activities or capital purchases over taking on new debt, thus implying
a ‘pecking order’ with respect to financing activities (Bowman, 2002;
Garcia-Rodriguez & Jegers, 2017). Only when NPOs lack reserves will
they turn to debt instruments. Further, Jegers (2018) makes the distinc
tion between ‘market debt’ and ‘non-market debt.’ Market debt consists
of common debt instruments provided by traditional financing institu
tions (i.e., banks, credit unions, etc.) whereas non-market debt consists
of debt instruments with fewer conditions attached for borrowing and
issued by ‘individuals or institutions with sympathy for the organiza
tion’s mission’ (Jegers, 2018, p. 90). This implies that the pecking order
is expanded, in order of preference, to include: equity, non-market debt,
and market debt. As for hypothesis, the ‘pecking order’ theory suggests a
negative relationship between measures of equity or net assets and capital
structure, for example, commonly measured as total liabilities divided by
total assets.
Alternatively, ‘static trade-off’ theory posits that nonprofit managers
prefer to maintain a sustainable balance between net reserves and debt as
long as the cost of incurring debt does not exceed its benefits (Bowman,
2002; Garcia-Rodriguez & Jegers, 2017). As such, by maintaining an opti
mal level of debt, NPOs are truly ‘leveraging’ their assets while maintain
ing reserves for other uses. Further, allocating a portion of expenses for
debt payments also curbs potential principal-agent problems emerging from
nonprofit managers’ preferences to use net assets for their personal projects,
rather than to further the organization’s mission (Bowman, 2002; Jegers,
2018). Thus, the static trade-off theory hypothesizes a positive relationship
between measures of net assets and capital structure.
Evidence from the literature has been mixed with studies finding
support for both theories. For example, Garcia-Rodriguez and Jegers
(2017), in examining the capital structure of nongovernmental develop
ment organizations across three countries (Spain, United Kingdom, and
Belgium) and using three measures of capital structure (i.e., short-term,
long-term debt, and overall debt,), find support for the pecking order
explanation of capital structure for measures of overall or total debt.
Garcia-Rodriguez and Jegers (2017) ran country specific models (i.e.,
one separate model for each country) as well as a country interaction
model and found significant negative coefficients between their measure
of equity (i.e., return on assets) and capital structure (i.e., leverage) for
the U.K. and Belgium but not for Spain. Calabrese (2011), in his test of
the competing capital structure theories, finds NPOs “reveal behavior
consistent with the pecking order theory,” regardless of whether capital
structure is defined as total leverage or financial debt (p. 139).
On the other hand, Bowman (2002), in analyzing nonprofit data from
the United States, points to the importance of endowments in decisions to
borrow. He hypothesizes that endowments allow for collateral and thus
nonprofit managers have more confidence in their ability to take on debt
in the presence of endowments and lenders also have more confidence in
lending to NPOs with endowed net assets. Indeed, Bowman (2002) finds
support for the static trade-off theory for NPOs with endowments, that
is, a significant positive coefficient between earnings (return on assets)
and capital structure, as well as a significant positive coefficient between
explicit measure of endowment assets and leverage.
From a practitioner’s perspective, Miller (2003) reminds us that an
NPO’s capital structure should reflect its core business. For example,
whereas a nonprofit theater and a for-profit commercial airline may
both have vastly divergent missions, “they have in common the busi
ness of filling seats” (p. 3). As such, a nonprofit theater house may have
a capital structure more similar to a commercial airline company than
to a nonprofit human service agency. What this suggests for research is
that capital structure should vary across nonprofit sub-sectors depending
on its core business. Nonprofit hospitals and educational institutions,
for example, are in the business of ‘filling beds and seats’ and are thus
expected to have more long-term assets and (potentially) more long-term
debt to finance these assets compared to a nonprofit advocacy organiza
tion, or a nonprofit human service agency that provides ‘meals on wheels’
as its core business. Evidence from existing studies does suggest that there
are indeed sub-sector differences with respect to capital structure. For
example, Bowman’s (2002) analysis tested for subsector differences (hos
pitals, higher education institutions, human service organizations that
provide housing, and arts and cultural organizations) and found that,
when considering the presence of endowment assets, there is no signifi
cant difference between human service housing organizations and hospi
tals with respect to leverage but that higher education institutions have
less leverage compared to housing organizations. This may not be sur
prising given that the core business of housing service organizations, like
hospitals, is to ‘fill beds’ and thus may require similar capital structures.
Higher education institutions, on the other hand, may have more sophis
ticated capital fundraising campaigns and as a result require less debt to
finance their activities.
On the other hand, Calabrese and Ely (2016) in their analysis of tax-
exempt bonds as a capital source of NPOs found that hospitals with
larger endowments had increased usage of tax-exempt bonds. This find
ing is consistent with Gentry’s (2002) findings that endowment assets and
tax-exempt bonds are concentrated in a minority of hospitals. He further
notes that “over half of tax-exempt debt could be retired by hospitals
reducing their endowments” (Gentry, 2002, p. 871), a finding consist
ent with static trade-off theory. Although just one form of borrowing,
these findings are noteworthy because tax-exempt borrowing comprises
45% of all financial liabilities outstanding in the U.S. nonprofit sector,
dwarfing the next largest liability category of mortgages at 24% (Cala
brese & Ely, 2016). Unsurprisingly, these figures are driven by hospitals
and higher education institutions that hold roughly 75% of the U.S. non
profit sector’s tax-exempt debt.
Another sectoral difference of note is Calabrese and Ely’s (2016) find
ing that arts organizations “prefer internal financial resources for capital
expansion—consistent with the pecking order theory of capital struc
ture” (p. 473). In summary, the review of existing studies suggests that
nonprofit financing behavior is not one dimensional and that there is var
iation by country and sub-sector. As Garcia-Rodriguez and Jegers (2017)
point out, there may be key macroeconomic variables at the country level
that may explain differences in financing behavior, such as differences
in legal-systems, political stability, and government effectiveness, among
others. In this chapter, we further our understanding of nonprofit capital
structure by examining data from the Canadian nonprofit sector. Canada
offers a unique case study as it is similar politically and economically to
the United States but differs in governmental support of its nonprofit
sector. There are also relatively few studies in the nonprofit finance lit
erature that focus on Canada and none that focus on capital structure, as
far as we know. Thus, this chapter makes an important contribution to
the nonprofit finance literature. In the next section, we briefly review the
scale and scope of the nonprofit sector in Canada.
Canadian Nonprofit Sector

Canada’s nonprofit sector is the second largest in the world, measured
as a share of its respective economically active population (Hall, Barr,
Easwaramoorthy, Sokolowski, & Salamon, 2005). Similar to other
developed countries, the Canadian nonprofit sector provides vital health,
cultural, and social services to residents of its most underserved com
munities. Canadian NPOs also operate with a business model similar to
other NPOs in developed countries—generating revenue prior to service
provision and providing services to clients regardless of ability to pay.
Often, services are provided at no-cost to the client or at prices below the
cost of production (Walker & Osterhaus, 2010). Thus, Canadian NPOs
must generate revenue through multiple streams of income to cover the
cost of production, to build reserve funds, or simply to grow and expand
services. The Canadian nonprofit sector is unique, however, in that it
receives a larger share of revenue from the government compared to its
North American counterparts, including funding for civic and advocacy
organizations. Specifically, on average, nonprofit and voluntary organiza
tions in Canada generate 51% of revenue from government sources, fol
lowed by 39% from fees for service, and 9% from philanthropic sources
(Hall et al., 2005). Canadian NPOs also have a high reliance on volun
teers (Hall et al., 2005).
A distinction needs to be made between ‘registered charities’ and ‘non
profit organizations’ in Canada. Whereas both types of organizations are
mission-driven rather than profit-driven, and exist for the benefit of the
larger society or for specific members, registered charities are more for
mal, offer more tax benefits, and serve a boarder clientele compared to
NPOs (Government of Canada, 2016). For example, registered charities
must formally register and apply to the Canadian Revenue Agency (CRA)
for approval to operate as a charity whereas NPOs are not required to
go through this process. As such, registered charities also have more for
mal annual reporting requirements and file a more extensive tax form
(T3010) compared to NPOs (T2). In addition, as already mentioned, reg
istered charities serve a broader clientele and operate with a broader mis
sion whereas NPOs, in general, work in more specific areas such as sports
recreation or civic improvement.2 Finally, forms of income generation
also differ as registered charities can issue donation receipts for income
tax purposes whereas NPOs cannot do so (see endnote 2 of this chapter).
Given that the data for this chapter are drawn primarily from tax form
T3010, the analysis, discussion, and implications are for the population
of registered charities only rather than for the population of NPOs.
Methods
Data
To illustrate and test our hypotheses, we use archived data from the
Canadian T3010 form. This form, similar to the Form 990 in the United
States, is required for all Canadian charities. However, unlike the U.S.,
the Canadian data capture organizations that are not required to file in
the U.S., such as congregations. We compiled and cleaned data from
2009 to 2016 into a well-balanced panel of 676,721 observations.
One important step in our data cleaning process is to exclude charities
with less than $100K in revenue. Charities which have over $100K in
revenues supply more granular information than smaller charities. This
is similar to the difference in filing the 990 and the 990EZ in the United
States, except that Canadian charities are filling out a different portion of
a single form that is primarily common across all sizes. Because charities
under $100K do not supply much detailed information on their finances,
this study restricts the sample to those receiving over $100K in revenues
(329,946 observations). The removal of observations with missing or
potentially misreported necessary data and the use of lags in the inde
pendent variables produce a final sample of 229,970 observations over
seven years, or 39,574 charities per year. Finally, we exclude extreme
outlying observations by ‘winsorizing’ all ratio variables at the 1st and
99th percentiles.
Variables
Dependent Variable
To measure capital structure, we follow Bowman (2002) as well as
Garcia-Rodriguez and Jegers (2017) and use the debt ratio, or LTA (Lia
bilities to Assets). This is operationalized as total liabilities divided by
total assets, with a ratio of one reflecting a balance of liabilities and assets.
The higher the ratio, the more debt the charity sustains per dollar of asset.
Independent Variables
We include four primary predictors in our model, each measured as a one-
year lag of the dependent variable. The first is return on assets (ROA),
which is a measure of profitability (here operationalized by revenue minus
expenses or net income) divided by total assets. The second is a measure
of the liquidity of existing assets (liquidity). This is calculated as cash and
amounts receivable over total assets. Liquidity is important for organiza
tions because it can be useful as a protection against funding disruption,
and this will be a factor considered by management in debt structure.
The third measure is a capture of the impact of an endowment or quasi-
endowment (endow), which other scholars have found important (Bow
man, 2002; Calabrese, 2011). Unlike in the U.S., there is no box to check
signaling an endowment, nor is there a required disclosure of permanently
restricted net assets. However, charities are required to disclose the dollar
value of their assets which are not involved in charitable activities. This
means that these assets are used to produce another stream of income,
either unrelated market income or investment. Our endowment variable
therefore includes the monetary value for these assets, normalized by total
assets. So, although this variable includes both possibilities, capturing the
existence of such a revenue stream is important to debt structure.
Finally, we include a variable for size (beyond the total asset figure used
as the denominator in our ratios) in order to capture size effects (size).
Our measure of size relies on the natural log of a charity’s total revenue.
Descriptive statistics of all these variables can be seen in Table 11.1.
Analysis Procedure
This analysis relies on fixed effects models. Our models account for fixed
effects on two dimensions, firm and subsector, in order to identify asso
ciations between lagged values of our independent variables and lever
age. We rely on STATA package reghdfe, developed by Correia (2016), in
which the estimator efficiently accounts for these fixed effects by demean
ing each variable and identifying their joint convergence. This method is
more efficient than using dummy variables when the number of catego
ries represented by a variable is large (Correia, 2016).
Results
ROA: In the initial model (Model 1, Table 11.2) for all charities, only the
ROA variable was statistically significant. More net income per dollar
Table 11.1 Descriptive Statistics (Total Revenue $100K+) (2016)
Variable n Mean SD
Leverage 35,987 0.45 0.79

ROA 40,803 0.19 1.13
Liquidity 43,111 0.45 0.39
Endow 43,111 0.02 0.13
Size 41,729 13.20 1.44
Table 11.2 Leverage of Canadian Charities (Revenue $100K+)
(Model 1) (Model 2) (Model 3)

All Charities Holding Land Without Land
b b b
(S.E.) (S.E.) (S.E.)
ROA –0.044*** –0.051*** –0.046***

(0.01) (0.01) (0.01)
Liquidity 0.006 –0.051** 0.006
(0.02) (0.02) (0.03)
Endow –0.007 –0.001 –0.006
(0.01) (0.01) (0.02)
Size –0.002 0.01** –0.008
(0.00) (0.00) (0.01)
Cons 0.461*** 0.244*** 0.591***
(0.06) (0.05) (0.07)
R-Squared 0.74 0.799 0.752
Groups 38,291 17,337 22,417
n 195,801 86,789 105,910
***
and ** indicate that coefficients are statistically significant with a confidence level of 99%
and 95%, respectively.
of asset is associated with a 4.4% reduction in liabilities per asset in the

following year. This is an encouraging sign, consistent with higher ROA
charities using their net income to either a) pay down their liabilities or
b) acquire more assets without the accumulation of more debt. The role
of ROA is also statistically significant, whether examining those charities
that hold land and buildings (Model 2) or those who do not (Model 3).
We find no evidence that the association between leverage and ROA is
contingent upon holding land or buildings.
Liquidity: The liquidity of the asset portfolio is not statistically sig
nificant when examining all charities (Model 1). However, this changes
when charities that own land are analyzed independently (Model 2).
Here, we see evidence of a negative and statistically significant relation
ship between liquidity and LEV. This could be due to organizations flush
with cash paying down their liabilities in ensuing years, but could also
be that the existence of more liquid assets in the asset portfolio indicates
the ability to shield against revenue disruption. Further, the negative coef
ficient between liquidity and LTA for land holders further suggests that
charities are using liquid reserves primarily to ‘smooth’ out cash flow,
rather than for new land acquisition.
Also notable is the insignificant coefficient for liquidity among chari
ties which do not own land (Model 3). As noted earlier in the chapter,
access to capital is a concern among charities because of their business
models, size, and inability to offer equity stakes. Debt is often secured
through collateral such as large fixed assets. Organizations without land
or buildings may not be able to fully utilize their debt capacity. This
would indicate that the composition of the other elements of the asset
portfolio is irrelevant to the ability to use debt.
Endow: The existence of a quasi-endowment was not significant in our
models. Whereas we believe it to be a potentially important control varia
ble, our models do not suggest that non-mission assets impact leverage. In
future work, we hope that scholars gain the ability to separate investment
assets from those used in the production of non-mission market income
in order to further examine these assets and identify any direct effects.
Size: Like liquidity, the role of size in debt structure is dependent on the
presence of land or buildings. In Model 1 for all charities, the role of size
is practically irrelevant; however, this changes when the analysis is limited
to those organizations with land or buildings. For those charities which
own land or buildings, larger organizations are more likely to have higher
levels of debt per dollar of asset. As suggested in the literature, this is likely
because size increases a charity’s debt capacity, or the ability to take on debt.
However, we find this is limited to land or building owning charities, sug
gesting that land may be a precondition necessary to access debt capacity.
Discussion and Conclusion

Using panel data over an eight-year period we explored the capital struc
ture of Canadian charities. Consistent with previous research on the
drivers of nonprofit capital structure, our analysis yielded mixed results.
Whereas some previous research suggests organizations with larger
endowments hold more debt (Bowman, 2002; Calabrese & Ely, 2016;
Gentry, 2002), our findings indicate that the presence of an endowment
does not positively influence external financing relative to assets. Even
endowed organizations holding land were no more likely than others to
take on higher levels of leverage, suggesting a more cautious approach to
financing activities. This interpretation is supported by the finding that
highly liquid organizations holding land had significantly lower levels of
leverage. It seems likely that organizations are using their cash to finance
activities and, possibly, to pay down outstanding debt.
Our most notable and consistent finding is the negative relationship
between profitability (return on assets) and leverage (debt ratio). Whether
or not an organization holds land, higher levels of profitability in these
charities were associated with lower levels of debt relative to assets. This
result is consistent with pecking order theory and suggests NPOs are turn
ing to internal sources of funding before incurring debt. What is not clear
from our findings is whether these organizations are holding lower levels
of debt and using internal financing, as opposed to external financing, in
response to normative and legal pressures to maintain a low debt ratio.
The literature on capital structure warns that organizations with a
suboptimal mix of debt and assets incur higher costs of capital and risk
having worse financial health. It is possible that by holding lower levels of
debt, NPOs in our sample have suboptimal capital structures. According
to corporate literature, this unbalanced proportion of debt to assets could
be inhibiting organizational growth and financial well-being. However, it
is also possible that by relying on internal sources of financing these NPOs
are strategically forgoing a balanced capital structure in favor of optimiz
ing their overall organizational performance. Nonprofit borrowing is not
a judgement-free activity, and NPOs may suffer consequences by holding
higher levels of debt than normative boundaries suggest is appropriate.
Although an optimal capital structure may yield various associated
financial benefits to an organization, it is possible that having an ‘opti
mal’ capital structure comes at the cost of organizational trustworthi
ness, thus jeopardizing future donative revenue flows. Therefore, in the
nonprofit context, prioritizing internal financing and avoiding external
financing may signal to donors and other external stakeholders that
nonprofit directors are conservative and attentive financial stewards.
Overall, organizational performance—i.e., balancing an organization’s
financial position, current operations, and future programmatic goals—
may require a different conception of capital structure. Further, accord
ing to pecking order theory, no optimal mix of capital structure exists
(Jegers, 2018). From this view, organizations turn to the cheapest source
of funds, typically internal ones. Once those funds are depleted, then
managers turn to the next cheapest source, issuing debt.
In the Canadian context, there may be broader institutional or cultural
explanations for debt issuance. Maintaining an ‘optimal mix’ between debt
and assets may not be a common business practice, for example, in coun
tries with cultural norms that view debt negatively at both the individual
and organizational level, or if public policy and business practices do not
incentivize borrowing. The significant and negative relationship between
liquidity and leverage for charities that hold land may be a clue that suggests
a broader society aversion to debt and a propensity to use liquid reserves
to reduce debt. Finally, further comparative work may reveal that in socie
ties with robust social and health safety nets, NPOs may feel less pressured
to grow and expand services through leveraging assets with debt. At the
practitioner level, additional research is needed to determine how nonprofit
practitioners manage capital structure decisions. As with other matters of
nonprofit management, these consequential decisions are not likely to be
made in isolation and should be viewed in a broader systems context.
Notes
1. Equal contribution by each author.
2. Canadian government website (www.canada.ca/en/revenue-agency/services/
charities-giving/giving-charity-information-donors/about-registered-charities/
what-difference-between-a-registered-charity-a-non-profit-organization.html).
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Part III
New Ways of Financing

and an Approach to the
Business Practices
12 Business Practices in
Nonprofit Funding
Gabriela Vaceková, Mária Murray
Svidroňová, Michal Plaček,
and Juraj Nemec
Introduction
In this chapter we delve into other ways of nonprofit funding that come
from the business world (among them, Chapter 13 will focus on crowd-
funding specifically). “Research on NPOs becoming business-like has
increased continuously since the 1980s, and, in view of recent develop
ments, is more relevant than ever” (Maier, Meyer, & Steinbereithner,
2016, p. 78). On the one hand, there is an effort to achieve nonprofit
organization (NPOs) financial independence, which supports the idea of
NPOs becoming business-like. On the other hand, there is the frequently
stressed ‘non-commercial’ mission and purpose of NPOs, which might
seem in contrast to becoming business-like. For a deeper look at this
issue, in this chapter we aim to answer the following research questions:
• Are NPOs becoming business-like? If so, why?

• What are the effects of NPOs becoming business-like?
Literature on this issue is fragmented, and scholarly attitude towards

this phenomenon is diverse (see Maier et al., 2016 for a systematic litera
ture review on NPOs becoming business-like). Hence, we aim to review
the international definitional and theoretical approaches to the business
practices in nonprofit funding originating in the Western environment
with a view to assessing their applicability in the (post-)transitional con
text of the Czech Republic and Slovakia, when identifying the elements
of their conceptual core.
Phenomenon of NPOs Becoming Business-Like

All over the world, NPOs are experiencing the challenging implications of
austerity and financial uncertainty and are turning to commercial activi
ties in order to meet the emerging survival challenges (Vaceková, Valenti
nov, & Nemec, 2017). The Johns Hopkins Comparative Nonprofit Sector
Project documents commercial revenue as the most important funding
162 Vaceková, Svidroňová, Plaček, and Nemec
source of the global nonprofit sector (Salamon, Sokolowski, Haddock, &
Tice, 2013). Becoming business-like can assume many faces. It may
involve the increasing market orientation and entrepreneurial activism
of NPOs (Nicholls & Cho, 2006; Sharir & Lerner, 2006; Weerawardena,
McDonald, & Sullivan Mort, 2010) as well as their growing innovative
ness (Jaskyte, 2004; McDonald, 2007; Weerawardena & Sullivan Mort,
2006). It may also generate an overly competitive stance as well as an
increased interest in outcomes targeted by public policies (Weerawardena
et al., 2010).
The importance of commercial income has not gone unnoticed in the
nonprofit research literature (Vaceková et al., 2017). Serious concerns
about the potentially distracting effects of becoming business-like in
fulfilling nonprofit missions have been influentially voiced by Weisbrod
(2004), who recommended that “nonprofit organizations should get out
of commercial ventures” (p. 40) unless they want to “lose their souls”
(p. 46). It is difficult to resist the impression of at least an implicit moral
disapprobation when commercialization is understood as the ‘marketi
zation of welfare’ (Salamon, 1993) and is associated “with the explicit
intent of earning a profit” (Tuckman, 1998, p. 177) or with a business
like character (McKay, Moro, Teasdale, & Clifford, 2015). Eikenberry
and Kluver (2004, p. 135) contend that the benefits of nonprofit com
mercialization or marketization exact a price in the form of undermining
“the nonprofit sector’s role in creating and maintaining a strong civil
society—as value guardians, service providers and advocates, and build
ers of social capital.” All this “may be too high a price to pay” (Eiken
berry & Kluver, 2004, p. 135). The list of critical moral concerns about
NPOs becoming business-like can be extended, even when the com
mercialization is driven by commendable social and financial intentions
(Guo, 2006). These concerns can be summarized by admitting that the
ability of NPOs to succeed in their mission and improve the social quality
of life is “limited by the corrupting effects of the embedding pecuniary
culture” (Valentinov, 2011, p. 901).
At the same time, the existing literature includes many arguments for
accepting or even promoting NPOs becoming business-like. For one, it
may well be the case that nonprofit commercialization as such is a much
too abstract and broad concept to enable a meaningful moral judgment.
As a starting point, it makes good sense to follow Enjolras’s (2002) dis
tinction between the two paths of commercialization: commercializa
tion may be the result of activities intended to finance the production of
mission-related outputs or it may be the result of the transformation of the
relationship between the organization and its members from participation
to consumption. Moral concerns seem more appropriate in the latter case
than in the former. Froelich (1999, p. 246) suggests that these concerns
originate from “our casual, naïve, or maybe wishful thinking” about
NPOs that are assumed to be “travelling an unfettered path in pursuit of
Business Practices in Nonprofit Funding 163
(their) goals, free of mundane concerns associated with resource acquisi
tion.” Indeed, given that “many nonprofit organizations are located in
hostile environments” it follows that “commercial activities provide a
self-regulatory mechanism that enables, rather than hinders, nonprofit
organizations to perform their missions in environments where the supply
of critical resources is insecure” (Moeller & Valentinov, 2012, p. 366).
More generally, it seems that the phenomenon of NPOs becoming
business-like is another illustration of the well-known heterogeneity
of the nonprofit sector. Traditional approaches to the nonprofit sector,
including those of Salamon and Anheier (1998), illustrate the insuf
ficiency of single-factor explanations. It is becoming increasingly clear
that different NPOs have different goals and subsequently different struc
tures, both organizational and financial. The ‘governance’ theories (e.g.,
Peters, 2000) in particular underscore the spread of partnerships (not
only political ones) in modern Western societies. Furthermore, econo
mists have long recognized that public service delivery can be organized
through many mechanisms. Cullis and Jones (1992) document the trend
toward the pluralization of public service delivery, i.e., a shift away from
the classic public delivery system toward the increasing involvement of
private (for-profit and nonprofit) organizations. Pollitt and Bouckaert
(2000) likewise note that the traditional delivery systems are giving way
to multi-tiered systems exhibiting clear borders between financing, pro
curing, and producing functions.
Various key concepts describe the phenomenon of NPOs becoming
business-like (see Maier et al., 2016). NPOs can become business-like in
any dimension (organization, goals, rhetoric) in more or less comprehen
sive ways, maintaining alternative orientations to varying degrees (Maier
et al., 2016). This is embraced in the concept of hybrid organizations
(e.g., Evers, 2005), which emphasizes the merging of logics from different
fields. It has been argued that hybridity has long been, and will remain, a
characteristic of NPOs (e.g., Brandsen, Van de Donk, & Putters, 2005).
Even in the early years of the field of nonprofit studies, some voices were
already calling for recognition of the blurred boundaries between the sec
tors (Billis, 2010). DiMaggio (1987), Langton (1987), Salamon (1987),
Van Til (1988), Ware (1989), and Wuthnow (1991) all agreed that the tri
partite distinction between public, private, and nonprofit could be prob
lematic because this distinction conceals the interrelationships between
sectors. More recently, theoretical frameworks have emerged that are
characterized by a blurry sectoral boundary view. These frameworks rec
ognize that the sectors can overlap or mix. However, Nobel Laureate M.
Yunus, founder of the Grameen Bank, warns against putting too much
faith in hybrid organizations (see also Pestoff, 2012).
In the real world it will be difficult to operate a business with two

conflicting goals of profit maximizing and social benefits. The
executives of these hybrid businesses will gradually inch toward the
profit-maximization goal, no matter how the company’s mission is
designed.
(Pestoff, 2007, p. 33)
Hence, hybridization is being examined carefully (Donnelly-Cox, 2015)

and with some concern for its positive effects (e.g., Dees & Anderson,
2003; Hwang & Powell, 2009; Jones, 2007). There is evidence that the
benefits outweigh the risks (Brandsen & Karré, 2011) and that hybrids
will come to represent the ‘new normal’ of civil society organizations
(Brandsen et al., 2005; Donnelly-Cox, 2015; Evers, 2005).
Causes of NPOs Becoming Business-Like

Since the 1970s, neoclassical economists have been considering an appar
ent paradox: “The presence of nonprofit organizations inside markets
driven by the quest for profit” (Laville, Young, & Eynaud, 2015, p. 3).
Economics literature on the nonprofit sector has continued in the neoclas
sical tradition, which examines the reasons of entering NPOs in the market
economy (Laville et al., 2015). NPOs are chiefly explained in terms of their
ability to address market failure (Jegers, 2008; Steinberg, 2006). The limi
tations of this explanation are, however, widely recognized (see Steinberg,
2006). Specifically, the market failure explanation does little to include the
motivational phenomena, such as ideological commitment, altruism, social
values, and mission-drivenness, that are critical for the effective operation
of the nonprofit sector (Rose-Ackerman, 1996). Valentinov (2011) argues
that it is for this reason that the market failure explanation for this sec
tor is supplemented with the ideological entrepreneurship theory, which is
centrally concerned with the motivational phenomena.
The services that NPOs are expected to provide are those that involve
some ‘public’ or collective character. Such goods and services are typi
cally difficult to supply through the private market because they are
available to everyone regardless of whether they have been paid for,
because those in need of them lack resources, or because the services
require some special element of trust (Hansmann, 1980; Salamon, 1987;
Weisbrod, 1975). Salamon, Hems, and Chinnock (2000) showed that “in
situations where trusted economic institutions to provide credit or assist
with marketing and related roles are unavailable, moreover, nonprofits
can also be expected to provide such economic services (e.g., in many
developing countries and transition economies)” (p. 5). Moreover, “in a
number of places, the nonprofit service role is not distinguished sharply
from that of government, although in some places, such as Central and
Eastern Europe (CEE), nonprofit organizations are now expected to be
the primary service providers (e.g., Hungary, Romania, Slovakia)” (Sala
mon et al., 2000, p. 15).
The relation to the public sector presents a crucial contrast with the
institutional embedding of nonprofit commercialization in the Western
world, where this phenomenon is taken to be an integral part of neolib
eral governance (Evans, Richmond, & Shields, 2005). Far from promot
ing autonomy from the public sector, commercialization in the neoliberal
governance system “hides a steeply hierarchical and centralized relation
ship of power embedded in a contractual arrangement between the state
and those agencies increasingly responsible for the delivery of public
goods and services” (Evans et al., 2005, p. 78). This hierarchical rela
tionship is most visibly demonstrated in the reorientation of nonprofit
accountability from a broad range of civil society actors toward the state
(McCambridge, 2005).
Effects of NPOs Becoming Business-Like

Based on an extensive systematic literature review Maier et al. (2016)
came to the findings that “causes [of nonprofits becoming business-like]
have been researched extensively and appear to lie in the organization’s
environment, within the organization, and on the interface between the
organization and its environment, that is, in the way the organization
responds to environmental conditions” (p. 72). Researching into this direc
tion brought also interesting findings about the effects of NPOs becoming
business-like, as they seem to occur in “four areas: organizational per
formance; NPOs’ fulfillment of societal functions; power, knowledge and
subjectivities; and NPOs’ legitimacy” (Maier et al., 2016, p. 75).
“If not for profit, for what?” This question is also the title of Dennis
Young’s pioneering work (1983) exploring a behavioral theory of the
nonprofit sector based on entrepreneurship. More than 30 years ago,
long before widespread research into entrepreneurship in the nonprofit
sector was popular, this work “catalyzed a research stream that also
forms the basis for an entire academic discipline” (Frank, 2013, p. xxix).
The current challenge for nonprofit scholars is to continue to cultivate
this rich field of inquiry in the quest for a better understanding of “how
society can encourage, support and engage entrepreneurial energies for
the public good” (Young, 2013, p. xvi). However, the field remains dif
ficult to grasp in its entirety, as researchers use a multitude of similar, yet
distinct, key concepts. The considerable range and complexity of these
overlapping notions create major challenges: “Scholars struggle to posi
tion their work in a larger context; it is not easy to build on previous find
ings and methodological developments; and research gaps are difficult to
identify” (Maier et al., 2016, p. 64).
Hybridity is of both theoretical relevance and practical importance
around the world, including in the post-Communist economies. The
trend towards emerging hybridization in the transitional economies of
CEE has increased significantly in recent years, taking into account the
considerable heterogeneity of transitional economies. Even in the early
years after the transition, public services were being delivered by hybrid
organizations operating in the intersections of the market, the civil soci
ety, and the public sector.
The Case of the Czech Republic and Slovakia

Some scholars may see NPOs becoming business-like as a moral dilemma
because commercial activities may secure the survival of the organiza
tion at the expense of undermining the mission orientation. This moral
framing of the commercialization debate is insufficient for describing the
Czech and Slovak nonprofit sectors, which are still struggling to develop
their own distinct institutional identities (see Vaceková et al., 2017).
Financial independence is part of this identity, and commercial activi
ties might be able to assist NPOs in emancipating themselves from the
previously paternalistic state. The institutional nature of the commer
cialization phenomenon in the Czech Republic and Slovakia has been
emphasized on this basis (Vaceková et al., 2017). The decisions favoring
commercialization by nonprofit managers in the (post-)transitive context
of CEE are shown to be heavily influenced by the current institutional
and regulatory environment, which explicitly promotes nonprofit self-
financing initiatives. If nonprofit commercialization is understood as an
institutional phenomenon, then its moral significance is best captured in
terms of institutional ethics rather than in terms of the individual ethics
of nonprofit managers, an approach that seems to be predominant in the
Western literature (Vaceková et al., 2017).
At this point, it is useful to step back and reconsider the influential
understanding of NPOs becoming business-like put forward by Weisbrod
(1998, p. 12): “Nonprofit organizations confront a dilemma, as does
public policy toward them: how to balance pursuit of their social mis
sions with financial constraints when additional resources may be avail
able from sources that might distort the mission.” This understanding
takes for granted that NPOs hold a distinct institutional identity defined,
among other things, by autonomy from the public sector. Whereas this
assumption is perfectly sensible for the Western and especially Anglo-
Saxon institutional environment, it is less applicable to the transitional
context of the Czech Republic, where the nonprofit sector still “remains
in statu nascendi” (Pospíšil, Navrátil, & Pejcal, 2014, p. 49). Accord
ingly, in the Czech and Slovak context, commercialization is not some
thing that needs to be balanced, or traded off, against the pursuit of the
NPO’s mission. Rather, it presents a tool for NPOs to gain autonomy
from the public sector and thus to become empowered to independently
define their missions in the first place.
Under these circumstances, nonprofit scholars and practitioners
alike need to be aware of the markedly different moral connotations of
nonprofit commercialization in the (post-)transitive context of the Czech
Republic and Slovakia and the Western world.
Thus, compared with the situation in Western countries, the causal
nexus of nonprofit commercialization in the Czech Republic and Slova
kia is shifted from the level of individual managerial decision-making to
the level of institutional environment. An indication of this argument is
that the legal and institutional definition of commercialization is quite
ambiguous, especially against the backdrop of a seemingly harmonious
relationship between commercialization and mission attainment. Insti
tutional ambiguities are certainly acknowledged in the Western litera
ture, which is sensitive to the existence of ‘for-profits-in-disguise’ that are
attracted into the nonprofit sector by the tax and subsidy advantages they
can get there (James, 1998, p. 273).
Western scholars acknowledge that commercialization and ‘for-profits
in-disguise’ may be similarly driven by cross-subsidization, which aligns
well with the assumption of the mission-drivenness of individual non
profit decision makers. In the Czech and Slovak context of peaceful
coexistence between commercialization and mission attainment, these
institutional ambiguities are amplified.
Finally, as an institutional and legal phenomenon, nonprofit commer
cialization in the Czech Republic and Slovakia has to be seen in the con
text of the ongoing evolutionary trends of the (post-)transitive welfare
state (see Vaceková et al., 2017). Horák, Horáková, and Sirovátka (2013)
contend that the nature of the public-private mix of social service deliv
ery is being affected by the centralization of decision-making, the mar
ketization and contractualization of service delivery, the increasing use
of new public management methods, organizational innovation, and the
increasing networking between state and non-state organizations. These
trends reflect the increasing involvement of the nonprofit sector in service
delivery processes, as well as its closer entanglement and coordination
with the public and private for-profit sectors (Bode & Brandsen, 2014).
In the Czech and Slovak institutional context (see also Nemec, Špaček,
Suwaj, & Modrzejewski, 2014), it is plausible to speculate that nonprofit
commercialization constitutes a part of the evolutionary dynamics of
the welfare state, a dynamic that is likely to be accepted by individual
nonprofit decision makers, and unlikely to be seen by them as a moral
dilemma in Weisbrod’s (1998) sense.
If there are discrepancies between social structure and semantics, then
such discrepancies are probably well exemplified by the precarious fitting
of the Western semantics of NPOs becoming business-like into the insti
tutional context of the Czech Republic and Slovakia. Whereas there are
few reasons to doubt that commercial pressures may indeed potentially
erode the mission orientation of certain NPOs in the Western world, more
generally, the (post-)transitive nonprofit sector still faces the challenge
of developing its own independent and distinct institutional identity, an
integral part of which is financial independence from the state. It is true
that in Western semantics, the attempts of Czech and Slovak NPOs to
secure their financial independence qualify as commercialization. In the
(post-)transitive context, however, this commercialization seems to be an
integral step in the difficult and lengthy evolution of a nonprofit sector
that would be worthy of the name. The (post-)transitive context defies
Weisbrod’s (1998) vision of commercialization as a moral dilemma of
individual nonprofit decision makers.
Taking into account the definition of hybrid organizations as those
that combine the characteristics of at least two of the public/private/third
sectors, the organizations in the Czech Republic and Slovakia that are
considered to possess significant characteristics of more than one sector
are usually social enterprises that can be defined as private and third sec
tor hybrids. To emphasize this central advancement and discuss both its
strengths and limitations, it is first necessary to return to the very roots of
the social economy concept and underline how its base differs from the
core feature of the nonprofit sector. Against this background, it will be
easier to discuss the relevance of the extended boundaries (Defourny &
Nyssens, 2016).
Conclusions
Perspectives on the future of NPOs are dependent on the observers’
worldviews and their interpretation of past and present dynamics (Casey,
2016). Recently, nonprofit scholars took note of a possible paradigm
shift in the field of nonprofit sector studies prompted by debates on its
commercialization. Most researchers distinguished “an America-led,
non-distribution, constraint-based positivist non-profit ‘sector’ paradigm
from a ‘new’ paradigm, emphasizing the blurry sectoral boundary, volun
tariness, and normative values” (Knutsen, 2016, p. 1563). This chapter
adds to the definitional clarification of the conceptual foundations of the
business practices in nonprofit funding. The emphasis of the scientific
discourse on NPOs becoming business-like in (post-)transitional coun
tries provides a basis for investigating the generally positive, normative,
and heuristic analysis of the nonprofit sector associated with insights that
consider the challenging socio-economic and political environments of
the Czech Republic and Slovakia.
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facbooks2013/1/
13 Crowdfunding as a New
Model of Nonprofit
Funding
Dita Hommerová
Introduction
Every year nonprofit organizations (NPOs) are faced with instability in
funding their activities. In their case, it is about the constant daily strug
gle to raise sufficient financial resources to ensure their operation. The
non-conceptual nature of this effort cannot usually be blamed on the
organization’s internal factors, but rather can be attributed to a phenom
enon of a macroeconomic, legislative, and societal character.
This chapter focuses on the modern phenomenon arising in the world
of project financing (crowdfunding) and its meaning for the development
of NPOs. Crowdfunding can be described as the process of raising finan
cial resources for commercial and non-commercial projects. It is based
on the concept of crowdsourcing, which uses a group of individuals to
get ideas, feedback, or solutions for specific tasks (Mack, 2012). There
are many different definitions of crowdfunding, such as: “Crowdfunding
involves an open call, mostly through the Internet, for the provision of
financial resources either in the form of donation or in exchange for the
future product or voting right to support initiatives for specific purposes”
(Belleflamme, Lambert, & Schwienbacher, 2014, p. 585; Steinberg &
DeMaria, 2012). According to Hainzer (2017) and Helmig and Boenigk
(2012), crowdfunding is an innovative and flexible instrument for financ
ing that can be used in many different facets regardless of the respective
organizational purpose.
Crowdfunding is one of the latest and most powerful methods to
finance projects, products, or even businesses. It is a trend with the goal
of expanding the possibilities of effective multisource funding for NPOs
(Hommerová & Severová, 2019). Investors are individuals who con
tribute a relatively small amount of money in a short time (Younkin &
Kashkooli, 2016). This method of financing is carried out via the Inter
net and is closely linked to social media (Banhatti, 2016; Ondráčková &
Černý, 2015). Crowdfunding keeps growing globally and so does the
development of specialized platforms that focus on raising funds, the so-
called crowdfunding campaigns.
174 Hommerová
Development of Crowdfunding and Reasons for Its
Success
Among the very first crowdfunding campaigns was that of Alexander
Pope, who in 1713 wanted to translate Greek poetry into English. His
subscribers pledged two gold guineas and were listed in an early edition
of the book. In 1783, Mozart took a similar path. He wanted to perform
three recently composed piano concertos in a Viennese concert hall. Like
many of today’s projects, Mozart’s first campaign was not successful. He
succeeded one year later. But, the most famous crowdfunding campaign
is probably the one organized by Joseph Pulitzer, who launched a fun
draising campaign to support the construction of the Statue of Liberty.
In just five months the world raised $101,091 from more than 160,000
donors (Clarkson, 2015).
Crowdfunding gained traction in the United States when Brian Came
lio, a Boston musician and computer programmer, launched ArtistShare
in 2003. It started as a website where musicians could seek donations
from their fans to produce digital recordings and has evolved into a
fundraising platform for film/video and photography projects as well as
music. ArtistShare’s first crowdfunding project was Maria Schneider’s
jazz album “Concert in a Garden.” Schneider offered a tiered system
of rewards (Freedman & Nutting, 2015). Since then, crowdfunding has
been constantly evolving; it has many new forms, and there are many
entrepreneurs and non-entrepreneurs who use this reliable alternative
source of funding. During the first ten years of its existence, it has been
estimated that crowdfunding encouraged investments to the amount of
$5.1 billion worldwide (Ondráčková & Černý, 2015).
According to Howe (2008), there are four reasons leading to the suc
cess of crowdfunding: 1) as a result of the specialization of jobs, pri
vate individuals are interested in contributing to economic production in
their spare time, they want to do something different, or they are willing
to share their knowledge; 2) the division of an overwhelming task into
small enough chunks makes it not only feasible, but fun; 3) the increasing
accessibility of information thanks to the Internet; and 4) the emergence
of online communities in which the online population is organized. The
Internet allows for communication between amateurs and professionals.
Where once professionals were in power, now a self-organizing commu
nity of amateurs takes on a large extent of the labor.
The main idea behind crowdfunding is very simple. A visitor to a
crowdfunding portal can be both investor and author of a new project.
The basic terms are defined as follows (Belleflamme, Omrani, & Peitz,
2016; Young, 2013):
• Investor is a person who financially supports a crowdfunding project

and receives various forms of compensations. The higher his/her con
tribution, the higher the reward.
Crowdfunding as New Nonprofit Funding Model 175
• Author of a project is a person who created a project which can be
part of a crowdfunding campaign.
• Crowdfunding portal is used for the implementation of projects. Por
tals must meet several requirements, such as: a detailed description
of a project, methods applied for the use of the financial investment
obtained, preparation of the necessary documents, video recording,
description of the project budget (i.e., of the target amount), defini
tion of rewards including their delivery dates.
• Crowdfunding campaign is a procedure during which the exist
ing project is published on the crowdfunding portal. The duration
of a campaign may vary, but the recommended length is 30 days.
During this period, investors can financially support the project.
If the author of the project reaches a predetermined financial tar
get, the entire amount belongs to him/her. Otherwise, the funds are
returned to investors (Eisenmann, Parker, & Van Alstyne, 2011;
Young, 2013).
In his book, Bruhn (2012) introduces the tools of classic fundraising,

which are a personal discussion, mailing, telemarketing, media fundrais
ing, events, online fundraising, mobile fundraising, and heritage fund
raising. It can be expected that future scientific literature on the subject
will include crowdfunding with a focus on the above-mentioned tools.
Crowdfunding Regulations in Europe

One of the first significant attempts at determining the intensity of utiliza
tion, the relevant legislation, the saturation of markets, and the analysis
of best practice examples, including an international comparison, is the
study published by the Visegrad Group (2014).1 The study describes the
legal and tax regulations in the V4 countries concerning the application
of crowdfunding, and also the legislative measures at the EU level and
expected legislative changes.
The very first study on the subject conducted by the European Com
mission was one presented in Brussels in April 2014 under the name
“Startup Europe Crowdfunding Network (30-CE-0557296/00–95).”
The study examined and evaluated a total of 230 crowdfunding plat
forms throughout the European Union. This study is based on the results
of a questionnaire survey, whose aim was to identify the reasons why
project owners used this new tool for funding start-ups, what their expec
tations were, what the requested amount was, why they have not used
this way of funding before, the possibilities of stimulating crowdfunding
servers in the future, the introduction of a kind of quality label (a year
later discussed as transparency label), the possibility of support by the
European Commission, and others (Startup Europe Crowdfunding Net
work, 2015).
176 Hommerová
In response to the growing significance of start-ups for the economy,
the European Commission decided to support this way of raising the
initial capital to develop business plans for both small and medium-
sized companies as well as the nonprofit sector. In its communication on
crowdfunding, the European Commission (2014) committed to creating
targeted support for this significant tool for funding starter projects and
refraining from introducing additional legislative obstacles.
On April 1, 2015, the European Commission published its own study
on the state and intensity of crowdfunding use in individual EU member
states. Apart from that, the study also presents successful examples of
crowdfunding application in start-ups.
Finally, in 2017, the European Commission (2017) published a review
of interpretations of existing regulation concerning crowdfunding in
Europe, North America, and Israel. Furthermore, the study also presents
the latest statistics on the use of crowdfunding.
Advantages, Disadvantages, and Possible Risks

Related to Crowdfunding in NPOs
Wymer, Knowles, and Gomes (2006) present the significance of the
Internet for NPOs. It is through the Internet that NPOs communi
cate with external groups. When the earlier-mentioned book was pub
lished, crowdfunding, i.e., community funding, had not yet become
a well-known concept. Belleflamme, Lambert, and Schwienbacher
(2013, p. 315) also confirm that this new fundraising tool has not been
addressed in scientific literature and that we are only now beginning to
gain knowledge of it.
By using crowdfunding, NPOs have the opportunity to solve a short
age of financial resources, especially during the initial phase of their
business activities. It provides funding and support for unusual and inno
vative projects which would not otherwise be supported by investors.
Small local projects get the chance to be funded by local resources. As
mentioned above, crowdfunding is not only about raising funds. Thanks
to crowdfunding, the author of a project carries out market research,
receives helpful information about customers’ interest and launches a
marketing campaign. One indisputable advantage of crowdfunding is the
fact that right from the start each project gets some kind of feedback
from potential customers and the idea behind the project is promoted
from the very beginning. Moreover, crowdfunding offers the opportunity
to enter into cooperation with the public sector (e.g., public funds) and
thus create common platforms. It unites the motivation of contributors
to fund various high-quality projects.
But despite its many positive aspects, crowdfunding also has many dis
advantages and risks. The presentation of a project to the public might be
very risky, because an innovative project can be copied or imitated. The
biggest risk is the financing of new businesses because a large number of
small investors get the opportunity to influence the operation of a newly
established company. Moreover, investors may force the author of a pro
ject to focus on organization in the community, which can negatively
influence the finalization of the project.
There are also some risks and disadvantages for the contributors, such
as fraud. A trusting contributor may be deceived by a swindler who cre
ated a presentation of a project on a crowdfunding platform. Once the
swindler receives a set amount of money, he/she stops communicating and
refuses to meet his/her obligations. The lack of user evaluation of a project
could also lead to possible frauds. Reviews are the best tool to support the
reputation of a crowdfunding platform. Another problem is the failure to
comply with deadlines set by the author of a project. Successfully funded
projects are very often delivered with delays. New projects are highly risky.
Moreover, there are some situations the author cannot control. These cru
cial situations can have a fatal impact on the project and could cause its
termination. Information asymmetry between the creator and funder plays
an important role, because of the distribution of risk, which is greater on
the side of the funder (Agrawal, Catalini, & Goldfarb, 2014).
Basic Crowdfunding Models

According to Young (2013) there are the following crowdfunding models:
donation-based crowdfunding; reward-based crowdfunding; debt-based
crowdfunding; equity-based crowdfunding. Černý (2015) also adds the
Royalty crowdfunding.
As can be seen in Figure 13.1, crowdfunding is based on investment or
non-investment models of financing.
Non-Investment Models
Non-investment models are suitable for the financing of one-time pro
jects when the funder does not expect the return of his/her investment.
These models are often used in the nonprofit sector.
The most popular non-investment models include donor- and reward-
based models.
Donation-Based Model
Donation-based crowdfunding is based on the fact that investors donate their
funds to a project without receiving any compensation in return. Usually,
this model is used for charitable or community projects (e.g., dog shelters).
The donation-based model is considered a subset of classical fundraising
and is typical for nonprofit projects (Černý, 2015; Young, 2013). Funders
are satisfied as they do a good deed and contribute to a useful project.
178 Hommerová
Crowdfunding
Non-
Investment
investment
Donation-
Lending-based
based
Reward-based Equity-based
Royalty
Figure 13.1 Crowdfunding Models

Source: Own processing according to Černý (2015) and Ondráčková and Černý (2015)
Donors are often engaged in the NPO’s activities rather than being
only in the position of financial supporters. Apart from dealing with
crowdfunding as a new source of funding, it would be advisable to deal
with managing relationships with donors and apply the calculation of the
indicator based on their assessment of the particular NPO.
Khodakarami, Petersen, and Venkatesan (2015) presented the princi
ple of building long-term relations with donors, taking into consideration
their life values. Hladká and Hyánek (2017) created a model of donor
behavior in the Czech Republic based on the results obtained from a
regression analysis of variables. The authors conclude that the variables
which statistically significantly affect the willingness to donate and may
be referred to as altruistic, are completely different from the variables
which affect the donation amount (Hladká & Hyánek, 2017, p. 26). The
donation amount is positively influenced by economic incentives (e.g., the
possibility of deducting the donation amount from the tax base) rather
than by altruistic sentiments.
Reward-Based Crowdfunding
Reward-based crowdfunding is based on remuneration. This model is
often used in the world of music, art, or culture, and it results in the
provision of the content to the funder. Very often, the funder is personally
involved in the creation of the project, which positively influences his/her
motivation to provide financial support.
In this case, the investor does not receive a financial reward, but a
thank you, discounts, a product or service. The main advantage for the
author of the project is the fact that he/she is not obliged to return the
donated financial means but provides non-financial rewards. Another
significant advantage of this model is the fact that the author is able, dur
ing the course of fund-raising, to create a strong fan and customer base.
Investment Models
Investment-based crowdfunding focuses on a future benefit or income for
the investor. This model includes lending- and equity-based and royalty
crowdfunding. These models are particularly applicable for profitable
projects.
Lending-Based Crowdfunding
The lending-based model is based on micro loans (i.e., peer-to-peer,
P2P). This concept focuses on raising money from a large group of indi
viduals in exchange for repayment of the investment with interests. The
interest rates are very often higher than those provided by monetary
institutions.
Lending-based crowdfunding connects lenders and borrowers, and its
principle is different from other crowdfunding methods as it is based
on lending money between individuals, not on the support of a project
or idea. Financial transactions are carried out without an intermedi
ary involved. This process is called crowdfunding because individuals
are lent money from a large group of people. These loans are based on
P2P and can be divided into: direct, indirect, secured, and unsecured
(Young, 2013).
Equity-Based Crowdfunding
This model is unique because the investor acquires an ownership inter
est in the company or business with the expectation that the company
will be prosperous. At a chosen moment, he/she can decide to sell his/
her share when under favorable conditions. The investor also has the
possibility to keep his/her share in order to benefit from profitable com
pany dividends. In this case, the investor becomes a shareholder in the
company.
This concept is particularly useful for start-ups and entrepreneurs who
are starting a business and need the initial capital in exchange for com
pany shares.
180 Hommerová
Royalty Crowdfunding
Royalty crowdfunding offers investors a percentage of revenue generated
from a project or company. Before the investment, the entrepreneur and
investor agree via a portal how much of the funds will be awarded to
the investor and what amount will be designated for the entrepreneur.
The yield depends primarily on the investment size. The advantage of this
model is based on the fact that the entrepreneur does not have to return the
funds until his/her project or company becomes profitable. Moreover, he/
she sells the share of potential success, and thus prevents the influence of
investors on his/her business. A disadvantage of this model may be based
on the fact that the company returns a substantial part of its profits back
into the development, production, and distribution of the product, and
therefore it should keep a sufficient proportion of its income. As a precau
tion, most portals provide the so-called buy-back guarantee which allows
entrepreneurs to repurchase the right to a share of income, respectively
limiting the duration of the entire contract. This model is useful for start
ups, whose owners want to keep the entire ownership of the company
(Černý, 2015).
Comparison of Successful Crowdfunding Platforms

This section presents the results of a comparison of successful crowd-
funding platforms. The lending-based model was not included in this
comparison, because it is based on lending money to individuals and does
not support creative projects (Young, 2013).
Comparison parameters are as follows: focus of the platform, year of
launch, users, special services, funding method, fees, number of successful
projects, the most successful project, the amount of invested funds since
the launch of the company, and the number of fans on social networks.
For the purpose of the comparison, the following successful platforms
were selected: Kickstarter, Indiegogo, Crowdrise, Seedrs, Crowdcube,
and GoFundMe. These individual platforms were compared on the basis
of the above-mentioned parameters. The number of fans on social net
works is a factor that greatly reflects on marketing and communication
activities of a company, and the number of successful projects together
with the total investment is clearly a factor indicating success and popu
larity of a crowdfunding platform.
Donation-Based Crowdfunding
In Table 13.1 we compare two of the most successful platforms of the
donation-based model. Based on the fact that some data have not been
published, the platforms are compared only in terms of the number of
fans on social networks and the number of successful projects.
Table 13.1 Comparison of Successful Platforms of the Donation-Based Model
Crowdrise GoFundMe
Focus Raises charitable Raises donations for
donations. important life events
and challenging life
situations.
Year of launch 2010. 2010.
Users Any legal or natural Any legal or natural
person who is 18 years person who is 18 years
or older. or older.
Special services Website perfectly Website perfectly
optimized. optimized.
Clear connection to social Main page divides the
networks. Opportunity projects that can be
to purchase promotional financially supported.
clothing. Clear description of
Celebrity section where the crowdfunding
celebrities express their process and methods of
personal opinions. financing.
Link to the section Decent Links to company news,
Humans or to the Chaos its successful projects,
Blog dedicated to the blog, popular articles,
publication of news of fundraising tips, etc.
the company.
Funding method Do not follow the concept The author of a project
of “all-or-nothing is not obliged to fulfil
funding.” The author the financial objective;
of a project receives the therefore he/she is
final amount collected. entitled to whatever
amount he/she receives
from donors.
Fees Commission of 3% of the Commission of 5% of
total donations. each investor’s donation
plus the payment of
transfer fees.
Successful projects > 1.5 million. > 2 million.
Most successful project No data. Support Victims of
Pulse Shooting
($7.85 million).
Invested funds since No data. > $3 billion.
launch
Fans on social networks Twitter: 26,100. Twitter: 536,000.
Facebook: 47,471. Facebook: 814,071.
Instagram: 4,930. Instagram: 13,800.
It is clear that the platform GoFundMe dominates on all social net

works. Both platforms were established in 2010 and have perfectly opti
mized websites. Funding methods are identical. It can be concluded that
GoFundMe is probably much more competent in the field of marketing
activities and user attraction.
182 Hommerová
The number of successful projects launched by GoFundMe exceeds
Crowdrise by about 500,000 projects. The reason may be a greater
awareness of the platform and the fact that it is considered a global
leader in donation-based crowdfunding.
Reward-Based Crowdfunding
Table 13.2 contains a comparison of two reward-based crowdfunding
platforms. Two such platforms have been operating in the market for
approximately the same length of time and they both rank among the
most successful crowdfunding platforms in the world. However, they dif
fer significantly in their funding principles.
As it is noticed, both companies use Twitter and Facebook to com
municate with followers. Instagram is not so popular because this
application was primarily designed for photo sharing and not for com
munication. It is clear that Kickstarter has much more active users on all
analyzed social networks than Indiegogo. The reason for this success can
be a wide offer of special services or better communication with users.
In terms of project success, the platform Indiegogo exceeds Kickstarter
by nearly 40,000 projects. The reason may be the possibility of both fixed
and flexible financing. Also, in terms of total sums invested in projects
Kickstarter clearly dominates Indiegogo. The reasons may be similar to
those used to explain the difference in the number of social networks
users, which is a greater offer of special services, better communication,
and certainly greater popularity of the platform.
Equity-Based Crowdfunding
Two examples of successful equity-based crowdfunding platforms are
Seedrs and Crowdcube. These platforms are comparable in terms of their
length of operation and other characteristics, substantially differing only
in terms of the geographical territory where they operate.
As shown in Table 13.3, Crowdcube is more active on the social net
work Twitter. However, Seedrs has more users on Facebook and Insta
gram who follow its marketing activities. It can be concluded that the
company Seedrs pays less attention to Facebook than Crowdcube does.
Regarding the successful projects, Crowdcube has more of them, spe
cifically 42 more. There may be several reasons for this: Crowdcube has
been on the market one year longer than Seedrs, the website is more
attractive (see the most successful projects of the Crowdcube platform),
and the commission fees are lower.
Conclusion of Comparison of Selected Crowdfunding Platforms

The most profitable donation-based platform is the platform GoFundMe
as it has reached the best figures. The company has thousands of fans on
social networks, and the most successful project reached the amount of
nearly $8 million.
Table 13.2 Comparison of Successful Platforms of the Reward-Based Model
Kickstarter Indiegogo
Focus Creative projects launched Supports creative projects.

in the world of music,
film, games, arts, and
technological innovation.
Users Any legal or natural person Anyone older than 18 years of
who is 18 years or older age.
and has a permanent
residence in the U.S. or a
tax registration number
(tax ID).
Special services Technical support Perfectly optimized and
throughout the entire interconnected with social
campaign. networks (Facebook, Twitter,
Perfect interconnection with Instagram, YouTube, and
social networks. LinkedIn).
Regularly published Offers interesting links,
statistics, live video of the consulting and analytical
project author. services, and a comparison
Overview of previous with the Kickstarter platform.
successful projects.
Funding The concept of ‘all Two forms of financing—
method or-nothing funding,’ flexible and fixed.
i.e., funds are provided Flexible financing (the more
to the project’s author expensive option) means
only if the project reaches the author can keep all
a predetermined amount, contributions even if the
otherwise the money is campaign goal was not met.
returned to the investors. The fixed model (the cheaper
option) is similar to
Kickstarter’s concept of
‘all-or-nothing funding.’
Fees 5% commission plus Fixed model: 5% of the total
transfer fees. Fees are not amount collected. No fees
charged if a project does charged if a project does not
not succeed. succeed.
Flexible financing: a fee of 5%
is charged even if the target
amount was not reached.
Obligatory transfer fees.
Personal cause crowdfunding
called Generosity provided
free of charge.
Successful > 122 million. > 175,000.
projects
Most Pebble watch Flow Hive ($12,174,187).
successful ($20,338,986).
project
Invested funds $2.9 billion. > $1 billion.
since launch
Fans on social Twitter: 1.1 million. Twitter: 321,000.
networks Facebook: 1,508,491. Facebook: 491,671.
Instagram: 154,000. Instagram: 31,000.
184 Hommerová
Table 13.3 Comparison of Successful Platforms of the Equity-Based Model
Seedrs Crowdcube
Focus An equity-based Focused on equity-based

crowdfunding company crowdfunding.
focusing on start-ups,
new projects, and
companies.
Users Anyone at the age of 18 or Authors of projects must
older residing in the EU, be at least 18 years
EEA, or Switzerland. old and meet the
legal requirements for
starting a business in
the UK.
Special services Perfectly optimized Perfectly optimized and
and interconnected interconnected with
with social networks. social networks. News
Complete information about the company and
about the company and a link to a company
its team on the website, magazine available
including a blog, case on the main page.
studies, and a glossary. A description of all
necessary activities and
obligations related to
the platform as well as
a download link for the
company app in the App
Store.
Funding method The concept of ‘all The concept of ‘all
or-nothing funding.’ or-nothing funding.’
Fees A 7.5% fee from the A 7% fee from the total
total amount collected amount collected plus
plus transfer fees. project and transfer fees.
Administrative and legal
costs included.
Successful projects 470. 512.
Most successful project Den—new sockets and JustPark ($3,620,000).
switches ($1,747,283).
Invested funds since > $213 million. $212,742,324.
launch
Fans on social networks Twitter: 27,800. Twitter: 39,700.
Facebook: 15,065. Facebook: 11,528.
Instagram: 580. Instagram: 286.
The most successful reward-based crowdfunding platform is Kick-

starter. Indiegogo has more successful projects, but much more money
has been invested in Kickstarter and the platform has a well-established
name across many countries, as evidenced by the high number of
followers.
The best equity-based crowdfunding platform is Crowdcube; the sec
ond one is the company Seedrs. Crowdcube is, therefore, the best plat
form for those who want to run a campaign dedicated to equity-based
crowdfunding.
Each server uses a different way of acquiring new projects. The most
successful ones must actively engage in marketing activities in the market
and communicate, i.e., not only offer the possibility of posting projects
on their websites, but also search for prospective projects and communi
cate with them. Less successful servers make do with offering applicants
the possibility to submit a project synopsis on their website. Advertis
ing, advisory, and consulting agencies are slowly beginning to realize that
there is a new phenomenon on the market and that in the near future there
will be demand for services such as creating a crowdfunding campaign.
Conclusions
The literature review declares important facts. To realize and offer—in
the long run—their services to the required quantitative and qualitative
extent, it is imperative that organizations of all different sectors need to
have access to financing. Fundraising as a set of methods aimed at raising
the funds necessary for the execution of activities of an NPO is only an
important means to an end. One of these options not only for the non
profit sector is crowdfunding. Crowdfunding is a trend with the goal of
expanding the possibilities of effective multisource funding.
Crowdfunding can be successful only on condition that the activities
the NPO offers are beneficial for the community and thus contribute
to society’s sustainable development. NPOs will profit if they embrace
and adopt it as not just another means for fundraising but as a tool that
empowers individual funders to actively participate in actualizing the
creator’s project.
The significance of fundraising in NPOs has been rising as the com
petition is getting tougher and there is an increasing number of organi
zations applying for both private and corporate donations, resources
from other budgets, and other forms of subsidies. Specialized publica
tions (particularly those from abroad) have offered various mechanisms
by the combination of which success can be achieved. The most fre
quently stated ones are, according to Helmig and Boenigk (2012), the
desire to help, altruism, psychological virtues, reputation, and the use of
donations.
As a conclusion it can be confirmed that crowdfunding as a new fun
draising tool has not been addressed enough in scientific literature yet
and that we are just beginning to gain knowledge of it. Now it also
should be the center of attention for science and research to secure sus
tainability; unfortunately, only little research exists in this area, even
internationally.
186 Hommerová
Note
1. It was conducted in cooperation between institutions from the four countries
of the so-called Visegrad Four (V4): Aspen Institute Prague (The Czech Repub
lic), Res Publica Foundation (Poland), The Budapest Observatory (Hungary),
and Creative Industry Forum (Slovakia).
References
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Contributor Bios
René Bekkers is Professor of Philanthropy and Director of the Center for

Philanthropic Studies at the Department of Sociology at Vrije Univer
siteit Amsterdam, the Netherlands.
Ignacio Bretos is Assistant Professor of Management at Zaragoza Uni
versity, Spain.
María del Carmen Caba-Pérez is Full Professor in the Public Manage
ment Sector and General Manager at the University of Almería, Spain.
Thad D. Calabrese is Associate Professor at the Robert F. Wagner Gradu
ate School of Public Service at New York University, USA, where he
heads the finance specialization.
Grace L. Chikoto-Schultz is Associate Professor of Nonprofit Manage
ment in the Mark O. Hatfield School of Government in the College of
Urban and Public Affairs at Portland State University, USA.
Esther de Quevedo-Puente is Associate Professor of Management at Bur-
gos University, Spain.
Arjen de Wit is Assistant Professor at the Center for Philanthropic Studies
at Vrije Universiteit Amsterdam, the Netherlands.
Millán Díaz-Foncea is Associate Professor of Management at Zaragoza
University, Spain.
Todd L. Ely is Associate Professor in the University of Colorado Denver’s
School of Public Affairs, USA, where he directs the Center for Local
Government Research and Training.
María del Mar Gálvez-Rodríguez is Associate Professor of Management
in the Department of Economics and Business at the University of
Almería, Spain.
Inigo Garcia-Rodriguez is Assistant Professor of Finance at the Univer
sity of Burgos, Spain.
Contributor Bios 189
Nathan Grasse is Associate Professor in the School of Public Policy and
Administration at Carleton University in Ottawa, Canada.
Dita Hommerová is Assistant Professor of the Department of Market
ing, Trade and Services of the Faculty of Economics, University of
West Bohemia in Pilsen (Czech Republic), and works at the Institute
for Sustainability in Technics and Economics of OTH Amberg-Weiden
(Germany).
Marc Jegers is Professor of Managerial Economics at the Vrije Univer
siteit Brussel, Belgium.
Marcus Lam is Assistant Professor in the School of Leadership and Edu
cation Sciences at the University of San Diego, USA.
Manuel López-Godoy is Assistant Professor in Financial Market and
Financial Management at the Department of Economics and Business
at the University of Almería, Spain.
Carmen Marcuello is Full Professor of Management at Zaragoza Univer
sity, Spain.
Natalia Martín-Cruz is Full Professor of Corporate Strategy and the Chair
of the Business Department at the University of Valladolid, Spain.
Víctor Martín-Pérez is Associate Professor of Management in the
Business Department at the University of Valladolid, Spain.
Juraj Nemec is full-time Professor of Public Finance and Public Manage
ment at the Faculty of Economics and Administration at Masaryk
University in Brno, Czech Republic, and part-time Professor at the Fac
ulty of Economics at Matej Bel University in Banska Bystrica, Slovakia.
Clara Pérez-Cornejo is Assistant Professor of Management at Burgos
University, Spain.
Michal Plaček is Associate Professor at the Faculty of Social Sciences at
Charles University in Prague, Czech Republic.
Christopher Prentice is Associate Professor of Nonprofit Management at
the University of North Carolina Wilmington, USA.
M. Elena Romero-Merino is Associate Professor of Finance at the Uni
versity of Burgos, Spain.
Narttana Sakolvittayanon is a Ph.D. candidate in Public Affairs and Pol
icy in the Mark O. Hatfield School of Government, College of Urban
and Public Affairs at Portland State University, USA.
Elizabeth Searing is Assistant Professor in the Rockefeller School of Public
Affairs and Policy at the University at Albany (SUNY), New York, USA.
190 Contributor Bios
Mária Murray Svidroňová is Associate Professor at the Department of
Public Economics and Regional Development at Matej Bel University
in Banska Bystrica, Slovakia.
Gabriela Vaceková is Associate Professor at the Faculty of Social Sciences
at Charles University in Prague, Czech Republic, and Associate Profes
sor at the Department of Public Economics at Masaryk University in
Brno, Czech Republic.
Pamala Wiepking is Visiting Stead Family Chair in International Philan
thropy and Visiting Associate Professor at the Lilly Family School of
Philanthropy at Indiana University, USA, and Professor of Societal Sig
nificance of Charitable Lotteries at the Center for Philanthropic Studies
at Vrije Universiteit Amsterdam, the Netherlands.
John Zietlow is Associate Faculty at IUPUI, Indiana, USA; Associate
Faculty at Indiana University, Indiana, USA; and Professor of Business
Administration at Southwest Baptist University, Missouri, USA. John
is also a Certified Treasury Professional (CTP).
Index
Note: Page numbers in italics indicate figures, and those in bold indicate tables.
accountability 3, 5–6, 18, 43, 49–53, 182; equity-based 177, 178, 179,
56–57, 77–78, 104 182, 184, 185; lending-based 178,
accounting 2, 25–28, 33, 43, 115, 179–180; model 177, 178; platform
117, 125–126, 137–138, 145 177, 180, 184–185; reward-based
agency problems 121, 127 177, 178, 182, 183, 184; royalty
alliance 7, 54, 75–76 177, 178, 179–180
altruism 11, 13, 18, 84, 90, 164, crowding-in 4, 15, 45, 90
178, 185 crowding-out 4, 15, 45, 83, 87–92
audit 43, 46n3, 55, 78, 121, 125
Data Envelopment Analysis (DEA)
board 16, 40–42, 45, 46n3, 54–55, 27–29, 31–34
68–69, 107, 114–116, 120, 125, debt 7, 121, 126n4, 131–132, 134,
129, 133–134, 136, 139, 142 138, 140, 145–150, 152–156
borrow 4, 114, 132–134, 140, 146, decision-making 14, 16, 19, 88, 167
147–150, 156 decision-making units (DMU) 27–28
business practices 2, 5, 77, 120, disclosure 43, 45, 50, 52–53, 56,
156, 161 125, 153
donation: charitable 75, 181;
Canada 64, 69, 87, 145–146, 148, corporate 16, 185; individual 1,
150–152, 154, 155–156 3, 5, 84, 90, 102; private 1, 4–5,
capital structure 4–5, 145–146, 13–14, 17–18, 83, 87, 89–90
148–152, 155–156 donor: corporate 12, 18, 40;
cash flow 1, 4, 114, 129–133, 137, individual 4, 11, 18–19, 51,
140–142, 148, 154 55–56, 90, 92, 147; motivations
cash management 1, 126n1, 129 12, 108; private 2, 13, 40, 76, 84;
causality 5, 45, 87 restrictions 116, 121, 126n2
charity 46n22, 64–67, 86–87, 104,
116, 145, 151–153, 154, 155–156 efficiency 2, 4–5, 17–19, 23–29,
Charity Navigator 46, 63, 147 32–34, 34n2, 100, 104, 125;
commercial activities 5, 163, 166 allocative 26, 29, 34n3; technical
commercialization 162, 165–168 26, 29, 34n3
compensation 12–13, 42, 46n3, 46n7, empirical evidence 6, 84–87, 92, 100
54, 121, 174, 177 endowment 84, 115–116, 134,
corporate social responsibility 75–76 140–141, 149–150, 153, 155
crowdfunding 1, 5, 15, 173–177, 178, environment 3, 6, 13, 15–17, 51, 55,
180, 181, 182, 183–184, 185, 190; 66, 76, 92, 99–100, 103, 106–107,
donation-based 177, 178, 180, 181, 132, 161, 163, 165–168
192 Index
Europe 11–12, 18, 85, 175–176 liability 126n4, 134, 137, 139–140,
expense: administrative 24, 26–27, 145, 147–148, 150, 152, 154
32, 34n3, 104, 132; program 43, liquidity 88, 103, 114, 116, 120, 125,
103–104 129–140, 140–142; management
external financing 4, 129, 4, 129–131, 135, 137–139; target
131–132, 156 135–139
loan 125, 126n4, 139, 179
financial distress 108
financial growth 100, 108 manager 16, 40, 44, 46n7, 64, 69,
financial health 2, 4–5, 83, 88, 100, 71–72, 77, 105, 114–116, 120,
103, 105, 107, 109, 118, 120, 125–126, 129–140, 142, 143,
129–130, 139, 143, 145, 156 148–149
financial vulnerability 103, 143 margin 5, 103, 114, 116–118, 119,
flexibility 108, 135–140, 141, 142 122, 125, 126n3
Form 990 104, 106, 116–117, 119, market failure 1, 164
121–122, 126n2, 152 meta-analysis 91, 100, 102, 105,
funders 40, 43, 72, 83, 87, 90–92, 107, 109
99, 101, 104, 108, 120, 136, 177, modern portfolio theory 102,
179, 185 104–106, 108
funding sources 89, 90, 101,
103–105, 108–110, 134 non-distribution constraint 114, 121
fundraising 1, 2, 4, 18–19, 26, 32, nongovernmental development
41–43, 53, 67, 75, 87, 91, 104, organization 32, 149
107–108, 141, 150, 174–177,
181, 185 organizational institutionalism theory
102–103
giving 15–16, 66, 83–84, 86–88,
91; charitable 91, 100; corporate pecking order theory 146, 148–150,
16–17; individual 87, 92; private 155–156
2, 15, 83, 89–90 practitioner 63, 78, 120, 130, 145,
governance 2–3, 5, 40–42, 44–46, 148–149, 156, 166
46n3, 46n18, 53, 54, 56, 69, price 2, 14, 19, 26–27, 29, 33, 34n1,
76–78, 83, 115, 125, 136, 163, 165 126n1, 151, 162
government failure theory 85 profit 16, 19, 33, 114–116, 118,
government funding 45, 83–84, 86, 119, 125, 131, 133–134,
88–89, 91 162–164, 180, 185
government grants 62, 100, 102, 107, profitability 25, 33, 152, 155
118, 119, 122, 124 public funding 4, 17, 19, 89
public good 1, 11, 13, 15, 17–19,
Hirschman-Herfindahl Index 84–85, 88, 91–92, 165
101–102, 105, 107 public sector 1, 13, 15, 19, 23,
hybrid organizations 163, 166, 168 165–166, 176
public subsidy 2
independence 4, 17, 46n3, 116, 161,
166, 168 ranking 20n4, 33, 44, 63
information asymmetry 43–44, 50, ratio 26–27, 31, 33, 34n3, 101,
77, 177 118, 119, 121–122, 123–124,
internal financing 4, 115, 148, 126nn2–4, 131–132, 134,
155–156 137–138, 147, 152–153, 155
Internet 1, 5–6, 51, 173–174, 176 remuneration 42, 178
reputation 2–3, 5–6, 62–63, 64–73,
legitimacy 50, 53, 62, 75, 103, 74–78, 84, 177, 185
108–109, 147, 165 reserves 1, 3–5, 116, 118, 120–122,
leverage 108, 146, 148–150, 125, 130, 134–136, 138, 140, 142,
153–154, 155–156 147–149, 151, 154, 156; operating
Index 193
115–116, 120–122, 123–124, tax 1, 14, 18, 26, 51, 69, 84, 88–90,
126n2, 126n4, 133, 135 116, 126n2, 151–152, 157, 175,
resource dependence theory 53, 178, 183; benefit 3, 146, 151;
102–103 exempt bonds 122, 126n4, 146,
revenue: commercial 161; 150; incentive 11, 13–14
concentration 99–101, 104, technology 2, 5, 7, 16, 28–29, 52, 57,
107; diversification 2, 4–5, 90, 183; informational 12, 15–18
99–109; sources 7, 83, 101–102, trade-off theory 149–150
104–108, 118 transaction costs theory 104
risk 3–5, 17, 34, 44, 76, 99, 103, transparency 2–3, 18, 27, 34, 45,
105–106, 109–110, 120, 129, 46n3, 49–51, 53–57, 54, 175
131–132, 136, 138, 142, 155, treasury 129, 131, 134, 140, 141;
164, 176–177 management 1, 129–130, 133
trust 15, 26, 41–42, 49, 57, 67, 71,
sales 40, 106 73, 75, 77, 164
scandal 6, 44, 47, 56–57, 62, 75–76
self-regulation 54 United States (U.S.) 6, 18, 41, 44, 46,
slack 4, 17, 114–117, 121, 131, 68, 72, 87, 90–91, 99, 107, 117,
134–135, 147 125, 131, 147, 149–152, 174, 183
social networks 51, 57
solvency 109, 137–140 volatility 103, 105–106, 121,
stability 4, 99, 103, 105–108, 150 131–132, 137
stakeholder 3, 5–6, 40, 42–44, volunteer 11–12, 22, 49, 51–54, 64,
49–53, 54, 55–57, 62, 71, 74, 67–69, 71, 74, 77, 100, 107, 133
76–78, 107, 120, 147, 156
surplus 103, 114–118, 119, 120, 122, warm glow 11, 84
125, 126n3, 133–136, 141 watchdog 19, 20n4, 44–45, 46n17
sustainability 23, 55, 57, 65, 100, website 15, 44–46, 50–53, 57, 67,
107, 109, 120, 130, 139 174, 181, 182, 184, 185
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Financing Nonprofit

The financial issues of nonprofit organizations (NPOs) have increased

Inigo Garcia-Rodriguez is Assistant Professor of Finance at the University

M. Elena Romero-Merino is Associate Professor of Finance at the University

Voluntary and non-profit organizations are playing an increasingly sig­

Financing Nonprofit Organizations

Also available from Routledge:

Strategic Management for Nonprofit Organizations

Regulating Charities: The Inside Story

Transfromational Leadership and Not for Profits and Social Enterprises

For more information about this series, please visit: www.routledge.com

Edited by Inigo Garcia-Rodriguez and

1 A Journey Through the Finance of Nonprofit

2 Why Do Donors Donate? 11

3 Efficiency in Nonprofit Organizations 23

4 Governance and Its Effect on Philanthropic Income 40

5 Accountability, Transparency, and Voluntary Disclosure

6 Nonprofit Organization Reputation and Its Role

8 Revenue Diversification, Growth, and Stability 99

9 Nonprofit Profits: Slack, Surplus, and Reserves 114

10 Treasury, Cash, and Liquidity Management in Nonprofit

11 Capital Structure and Financial Health 145

12 Business Practices in Nonprofit Funding 161

13 Crowdfunding as a New Model of Nonprofit Funding 173

Contributor Bios 188

The finance of nonprofit organizations (hereinafter NPOs), defined as

Which Motivations Do Donors Have? Which Theories

affiliation with a religion (especially Judaism and Protestantism);

The authors suggest that more research is needed to understand the

This is a hint that differences in giving behavior across nations are

Previous studies on motivations, behavior, and decision models are still

The impact of information technologies on donations to NPOs needs to

although corporate support for many nonprofit organisations (NPOs)

Which Organizational Features Determine That Some

The Problem of Measuring Efficiency in NPOs

Accounting Measures of Efficiency in Nonprofit Organizations

• Price is defined as the cost, for a donor, of purchasing a dollar of

When observed carefully, these forms of measuring efficiency are

Non-Accounting Measures of Efficiency in Nonprofit

Table 3.1 CCR Model

Output Orientation Input Orientation

urk � 5 ( r = 1,..., t ) urk � 5 ( r = 1,..., t )

Applying DEA in the Nonprofit Sector

• Number of patient days (Al-Shammari, 1999; Hu & Huang, 2004;

As regards the education sector, the most widely used measures to

• Number of students (Carrington, Coelli, & Rao, 2005; Coelli, 1996;

• Number of physicians (Al-Shammari, 1999; Grosskopf & Valdma­

In the education sector, the variables most widely used as inputs in

• Academic staff or faculty/student ratio (Athanassopoulos & Shale,

Application of DEA is far less widespread in the field of develop­

• Project expenditures (Golden, Brockett, Betak, Smith, & Cooper,

• Operating costs (Golden et al., 2012; Marcuello, 1999).

Introduction to the Relevant Concepts and Mechanisms

The Empirical Literature on Governance-Income

Fundraising Committee Composition

Financial Reporting and Auditing

• Is organizational transparency important to donors and public

Is Organizational Transparency Important to Donors and

Are Websites Still Important Despite the Growth of Social

How Can Voluntary Disclosure Be Measured?

Organizational profile Gandía (2011); Greenberg and MacAulay

transparency of organizational social responsibility, and transparency of

Measurement of NPO Reputation

Voluntary and non-profit organizations are playing an increasingly sig

• Number of physicians (Al-Shammari, 1999; Grosskopf & Valdma

Application of DEA is far less widespread in the field of develop

ROA –0.044* –0.051* –0.046***

It is clear that the platform GoFundMe dominates on all social net