Balance Sheet Insolvency and Contribution Revenue in Public Charities
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.
We gratefully acknowledge Thad Calabrese, Jacob Goldin, Ben Marx, Alex Rees-Jones, Dan Tinkelman, and Job White as well as seminar and conference participants at New York University, University of Maryland, NTA, APPAM, and ABFM for conversations and suggestions that have greatly improved the quality of this project. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Tatiana Homonoff & Thomas Luke Spreen & Travis St. Clair, 2020. "Balance sheet insolvency and contribution revenue in public charities," Journal of Public Economics, vol 186. citation courtesy of