Capital Structure of Nongovernmental Development Organizations

Abstract

In the first international study of this kind, we analyze the capital structure of 364 nongovernmental development organizations ( NGDOs ) from three different countries: Belgium, Spain, and the United Kingdom. We observe lower debt ratio values in the United Kingdom, and significant differences between countries were found by testing an econometric model with the five classical determinants of leverage, considering total debt and both long-and short-term debt. We find support for the pecking order theory, and we broadly discuss some possible reasons for the obtained differences.CAPITAL STRUCTURE REFLECTS THE MAIN fi nancing decision of organizations: choosing between equity and debt. In the nonprofi t sector, research has mainly followed previous research from the for-profi t sector, starting some decades later than in the corporate fi eld. Some limitations must be dealt with, such as the absence of international databases and, in general, the problematic access to the necessary information.This study focuses on a particular subsector of the nonprofit field, analyzing nongovernmental development organizations (NGDOs). In Europe, these are the organizations that work in the nonprofit subsector of the international cooperation and development, trying to improve the living conditions of developing countries. NGDOs receive a portion of the Official Development Assistance (ODA) from national governments, as well as significant donations from individuals. However, the recent economic and financial crisis had a huge impact on these nonprofit organizations (NPOs): some countries reduced their ODA; household income problems threatened private donations; and credit restrictions limited the available financing alternatives of organizations. All these problems have meant a critical financial scenario for these NPOs, so their leverage decisions become more relevant and their study more important. Furthermore, the literature on financial vulnerability of NPOs has emphasized the importance of the ratio of debt to total assets, as the more in debt, the more vulnerable (Andres-Alonso, Garcia-Rodriguez, and Romero-Merino 2016 ;Trussel 2002 ). In fact, higher debt ratio values had a negative impact during the financial crisis (Lin and Wang 2016 ).

Debt to Equity Levels in Polish Nonprofit Organisations

“…According to our survey data, the surveyed non-profits wished to have higher than 30 percent of debt in their capital structure, these are levels also reported in other European studies. Garcia-Rodriguez and Jegers (2017) found that average levels for the EU non-profits analysed in their study are more than 32 percent of debt (for Belgium, Spain and the United Kingdom). In our study, we have used macroeconomic indicators for 2014 and 2016 for the Polish environmental conditions.…”

“…Source: own study based on Holmstrom and Tirole (1996and 2001, Garcia-Rodriguez and Jegers (2017), Siekelova et al (2017). Non-profit entities are a kind of entity that are almost identical as for-profit businesses from the organisational side (Garcia-Rodriguez & Jegers, 2017, Rahman et al, 2017a.…”

“…Source: own study based on Holmstrom and Tirole (1996and 2001, Garcia-Rodriguez and Jegers (2017), Siekelova et al (2017). Non-profit entities are a kind of entity that are almost identical as for-profit businesses from the organisational side (Garcia-Rodriguez & Jegers, 2017, Rahman et al, 2017a. Such entities offer unpaid and paid products and services, and as non-profit entities, they are allowed to generate even large revenues which are sufficient to cover the costs of realisation of their mission, but non-profit entities have no right to collect equity capital through stock issuing and have no stockholders.…”

Governance and financial vulnerability of nonprofit organizations: an analysis of the NGDOs from Spain and the United Kingdom

“…Notwithstanding, collaboration between researchers from different countries is required for conducting this type of research, given the great differences between the regulations of each country. In this sense, a preliminary study has been performed (Garcia-Rodriguez & Jegers, 2016). It analyzes the capital structure of NPOs from Belgium, Spain and the UK, showing significant differences depending on the nationality of the organization.…”

“…No obstante, para llevar a cabo este tipo de trabajos de manera oportuna sería necesaria la colaboración entre investigadores de los distintos países, dadas las grandes diferencias entre las regulaciones de cada país. En este sentido, se ha desarrollado un estudio preliminar (Garcia-Rodriguez & Jegers, 2016) en el que se analiza la estructura de capital de ENLs de Bélgica, Reino Unido y España, mostrando diferencias significativas en función del país de origen de la organización. Esta construcción de muestras internacionales permitiría introducir el efecto de variables institucionales, macroeconómicas y culturales propias de cada país, tal y como se ha realizado en el ámbito empresarial (e.g., Laitinen & Suvas, 2016;Li & Harrison, 2008;Zheng, El Ghoul, Guedhami & Kwok, 2012).…”