Investment Decisions of Not-for-Profits: Evidence from Hospitals

41 Pages Posted: 14 Mar 2012

See all articles by Manuel Adelino

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Katharina Lewellen

Dartmouth College - Tuck School of Business

Anant K. Sundaram

Tuck School of Business at Dartmouth

Date Written: March 13, 2012

Abstract

This paper examines the investment decisions of not-for-profit hospitals. More than 20% of U.S. firms are not-for-profit, yet this organizational form has received little attention in corporate finance. This paper takes a step towards closing this gap. Our goal is to examine the role of frictions such as governance problems and financing constraints in investment decisions of not-for-profit firms. We start by developing a simple frictionless framework to analyze investment of not-for-profits, similar to the Q-theory for shareholder owned firms. We then test how exogenous shocks to cash flows affect hospital spending on different types of investments, salaries, and perks. The not-for-profit hospital sector provides a unique setting to examine these questions because most hospitals hold large financial assets (e.g., endowments), and hospital-specific shocks to the performance of these assets are likely unrelated to hospital investment opportunities. We find that hospital capital expenditures increase by 10 cents for every dollar received from financial assets, and the sensitivity comes almost exclusively from spending on equipment. The sensitivity increases to 23-27 cents when we consider investments over a two-year period. Hospitals in states with no regulatory oversight of capital expenditures have significantly higher cash-flow-investment sensitivities, suggesting that external governance mechanisms constrain overinvestment. The cash-flow-investment sensitivities are also higher for hospitals with lower financial slack.

Keywords: investment, cash flow, hospital, non-profit, not-for-profit, capital expenditure, agency, financing constraints

JEL Classification: G30, G31

Suggested Citation

Adelino, Manuel and Lewellen, Katharina and Sundaram, Anant K., Investment Decisions of Not-for-Profits: Evidence from Hospitals (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=2021399 or http://dx.doi.org/10.2139/ssrn.2021399

Manuel Adelino

Duke University ( email )

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Katharina Lewellen

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Anant K. Sundaram (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-8248 (Phone)
603-646-1308 (Fax)

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