Testing Competing Capital Structure Theories of Nonprofit Organizations

Abstract

The static trade-off and pecking order capital structure theories are analyzed and applied to nonprofit organizations. In addition, this paper also considers how nonprofits adjust their leverage over time. The analyses consider the unique role of donor-restricted endowments in the decision to borrow, as well as different types of borrowing by nonprofits. The results indicate that nonprofit capital structure choices are best explained using the pecking order theory, in which internal funds are preferred over external borrowing. Further, nonprofit endowment is not found to increase leverage. Despite the unambiguous findings across varying definitions of leverage, the results also suggest that a "modified pecking order" is a more apt descriptor of nonprofit behavior.

Borrowing for College: A Comparison of Long‐Term Debt Financing between Public and Private, Nonprofit Institutions of Higher Education

“…Private, nonprofit universities are generally very tuition dependent so enrollment growth generates more cash, decreasing the need to borrow. This finding is consistent with Calabrese ().…”

“…Finally, they acknowledge that not all nonprofit organizations will have access to debt because they are either not credit‐worthy or too small to have access through financial markets or lending institutions. Calabrese () conducts a broad study and finds empirical evidence that nonprofit managers prefer internal sources of capital over external borrowing.…”

Why So Many Measures of Nonprofit Financial Performance? Analyzing and Improving the Use of Financial Measures in Nonprofit Research

“…1 The data were cleaned following the recommendations of Bowman et al (2012) and Calabrese (2011b). 1 The data were cleaned following the recommendations of Bowman et al (2012) and Calabrese (2011b).…”

“…While Form 990 data have several documented weaknesses (Abramson, 1995;Froelich & Knoepfle, 1996;Froelich, Knoepfle, & Pollak, 2000;Zietlow, 2012), National Center for Charitable Statistics (NCCS) data are the standard for nonprofit finance research relating to capital structures (Calabrese, 2011b), endowments (Bowman, 2002;Bowman et al, 2012), and financial vulnerability (Calabrese, 2011a;Carroll & Stater, 2009;Greenlee & Trussel, 2000;Hager, 2001;Hodge & Piccolo, 2005;Keating, Fischer, Gordon, & Greenlee, 2005;Trussel, 2002;Trussel, Greenlee, & Brady, 2002;Tuckman & Chang, 1991). While Form 990 data have several documented weaknesses (Abramson, 1995;Froelich & Knoepfle, 1996;Froelich, Knoepfle, & Pollak, 2000;Zietlow, 2012), National Center for Charitable Statistics (NCCS) data are the standard for nonprofit finance research relating to capital structures (Calabrese, 2011b), endowments (Bowman, 2002;Bowman et al, 2012), and financial vulnerability (Calabrese, 2011a;Carroll & Stater, 2009;Greenlee & Trussel, 2000;Hager, 2001;Hodge & Piccolo, 2005;Keating, Fischer, Gordon, & Greenlee, 2005;Trussel, 2002;Trussel, Greenlee, & Brady, 2002;Tuckman & Chang, 1991).…”

Capital structure and profitability. A case of JSE Listed Companies

“…Debt's negative effect on profitability has been discovered by many researchers. According to Calabrese (2011) in capital structure theory financing costs are also an important consideration. A firm may have optimal leverage targets, but be prevented from using certain types of debts due to the cost of using these debt instrument.…”