NATIONAL BUREAU OF ECONOMIC RESEARCH
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Balance Sheet Insolvency and Contribution Revenue in Public Charities

Tatiana Homonoff, Thomas L. Spreen, Travis St.Clair

NBER Working Paper No. 26546
Issued in December 2019, Revised in May 2020
NBER Program(s):Public Economics

Using Form 990 data reported by public charities, we document significant bunching of nonprofits at near-zero net assets, the threshold for insolvency. Bunching occurs despite the fact that creditors cannot force insolvent nonprofits into involuntary bankruptcy. We show that the extent of bunching is greater among organizations that rely more heavily on contribution revenue, and that by inflating their net assets, bunching organizations are able to increase their contribution revenue relative to firms that report negative net assets. Charitable donors appear to use the net assets threshold as a heuristic for a charity's financial health; nonprofit managers, in turn, respond to the preferences of their donors.

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Document Object Identifier (DOI): 10.3386/w26546

Published: Tatiana Homonoff & Thomas Luke Spreen & Travis St. Clair, 2020. "Balance sheet insolvency and contribution revenue in public charities," Journal of Public Economics, vol 186.

 
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