Assessing Financial Vulnerability in the Nonprofit Sector
Elizabeth K. Keating
Harvard University - John F. Kennedy School of Government
University of Texas at Tyler - College of Business & Technology
Teresa P. Gordon
University of Idaho
Janet S. Greenlee
University of Dayton - School of Business Administration
KSG Working Paper No. RWP05-002; Hauser Center for Nonprofit Organizations Paper No. 27
Effective nonprofit governance relies upon understanding an organization's financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang's or Altman's in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson's model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.
Number of Pages in PDF File: 41
Keywords: Financial vulnerability, financial distress, bankruptcy prediction, nonprofit
JEL Classification: L31, M41
Date posted: January 12, 2005
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