Nonprofit cash holdings and spending: The missing role of government funding

Abstract

Charitable nonprofit organizations have long been under scrutiny with regard to how they manage excess funds, particularly cash holdings. Given previous empirical evidence, agency problems have been treated as an effective lens to explain the consequences of cash holdings among nonprofits. That is, nonprofit managers spend cash holdings for their own interests as opposed to the social interests of the organization. This study revisits the question of how charities manage extra cash and further examines the role of government funding in nonprofits' spending decisions. The results suggest that nonprofit managers make decisions on how to manage extra cash in accordance with the level of cash holdings; therefore, agency problems do not effectively explain how nonprofits manage extra cash. Furthermore, the results illustrate two contrasting roles of government funding in nonprofits' financial behavior: government funding may be used to monitor unscrupulous behaviors among managers, but it may also restrain nonprofits from investing in human capital.

The crowding‐out effect within government funding: Implications for within‐source diversification

“…With government becoming an important funding source for the nonprofit sector, the effects of government support on nonprofit operations have attracted long‐lasting attention. Although government funding offers various benefits (such as financial stability and institutional legitimacy) to help nonprofits overcome voluntary failures (Salamon, ), concerns also abound regarding the risks of nonprofits' dependence on government support for their autonomy and mission (e.g., Coupet, ; Grønbjerg, ; Guo, ; Lee & Woronkowicz, ; Mosley, ; Smith & Lipsky, ). Salamon and Toepler () summarized the pathological effects of government funding into four categories: (a) the potential loss of autonomy or independence, (b) managerial challenges of contractual relationship for nonprofits (“vendorism”), (c) bureaucratization resulting from government programmatic and accounting requirements, and (d) subdued advocacy activities to maintain government funding.…”

The new world of philanthropy: How changing financial behavior, public policies, and COVID‐19 affect nonprofit fundraising and marketing

“…In sum, governments at all levels have developed different initiatives to support and regulate NPO activities, including fundraising. Examples of such policies include creating regulatory bodies that develop standards for NPO operations such as the Fundraising Standards Board in the UK (Harrow, 2006 ), employing fiscal policy that dictates how NPOs can leverage resources (Lee & Woronkowicz, 2019 ), and implementing laws that regulate NPO work practices, like the U.S. Federal Trade Commission's regulation on public service announcements (Shanajan et al, 2010).…”

Elections, Political Connections and Cash Holdings: Evidence from Local Assemblies

“…This study makes several contributions to the literature. First, we contribute to the determinants of cash holdings in governmental organizations (Calabrese & Gupta, 2019;Core et al, 2006;Gore, 2009;Lee & Woronkowicz, 2019;Ramirez, 2011) by showing that elections and political connections significantly underscore cash holding levels. Second, we contribute to the agency conflict emanating from free cash flow (see Jensen, 1986;Stulz, 1990) by providing evidence that suggest elections may improve the practices of managers expropriating excess cash to the social interest of their locality as opposed to their own self-interested and perquisites consumption.…”

“…From a theoretical perspective, factors that stimulate agency problems appear to be the dominant underlying feature that characterizes cash management policies in nonprofit firms (Fisman & Hubbard, 2005;Lee & Woronkowicz, 2019). The reason being that, nonprofit firms are characterized by a weak governance environment (Core, Guay, & Verdi, 2006;Gore, 2009;Ramirez, 2011).…”

“…Therefore, nonprofit firms with more cash balances exhibit greater agency problems. However, the empirical evidence of cash holdings as a function of agency problem is mixed (Calabrese & Gupta, 2019;Gore, 2009;Lee & Woronkowicz, 2019).A competing interest exist as to the role of political uncertainty in cash holdings. On the one hand, cash holding is expected to be higher in the face of political uncertainty because of the tendency to increased managerial conservatism (Feng & Rao, 2018;Phan, Nguyen, Nguyen, & Hegde, 2019).…”