Investment Decisions of Nonprofit Firms: Evidence from Hospitals

67 Pages Posted: 15 Oct 2013

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: October 14, 2013

Abstract

More than 20% of U.S. firms are nonprofit, yet this organizational form has received little attention in corporate finance. This paper takes a step towards closing this gap by examining investment choices of nonprofit hospitals. Most hospitals hold large financial assets, and hospital-specific shocks to the performance of these assets are likely unrelated to investment opportunities. We use this setting to test how shocks to cash flows affect hospital investment. We find that capital expenditures increase, on average, by 10-28 cents for every dollar received from financial assets. The sensitivity is similar to that found earlier for shareholder owned corporations, and it is driven by spending on buildings and medical equipment. We do not find that hospital executives are significantly "paid for luck", or that spending on salaries of other personnel and perks responds significantly to cash flow shocks. Hospitals with an apparent tendency to overspend on medical procedures do not exhibit higher investment-cash flow sensitivities than otherwise comparable hospitals. However, the sensitivities are higher for hospitals that appear financially constrained.

Keywords: Investment, Cash Flows, Nonprofits, Hospitals

JEL Classification: G31, G32, L31

Suggested Citation

Adelino, Manuel and Lewellen, Katharina and Sundaram, Anant K., Investment Decisions of Nonprofit Firms: Evidence from Hospitals (October 14, 2013). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2340144

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 (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Anant K. Sundaram

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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