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 i...

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Bibliographic Details
Published in:Journal of public economics 2020-06, Vol.186, p.104177, Article 104177
Main Authors: Homonoff, Tatiana, Spreen, Thomas Luke, St. Clair, Travis
Format: Article
Language:English
Subjects:
Bunching
Charitable giving
Nonprofit finance
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Summary: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. •Unlike for-profits, insolvent charities cannot be forced into bankruptcy.•Nonetheless, we document bunching of nonprofits at the threshold for insolvency.•Bunching is greater for charities that rely more heavily on contribution revenue.•This bunching leads to an increase in contribution revenue in subsequent years.•This suggests donors use insolvency as a heuristic for a charity's financial health.
ISSN:0047-2727
1879-2316
DOI:10.1016/j.jpubeco.2020.104177