Valuing the Right to Sue: An Empirical Examination of Nonprofit Agency Costs

63 Pages Posted: 29 Sep 2016 Last revised: 10 Aug 2017

See all articles by Brian D. Galle

Brian D. Galle

Georgetown University Law Center

Date Written: August 9, 2017

Abstract

Do stakeholder suits against managers reduce agency costs? I examine this question using a large panel of private foundation tax returns, together with hand-collected data on state-law variations in the right of donors to sue wayward nonprofit managers. In both difference-in-differences and triple-difference estimations, I find on average that standing to sue substantially increases donations and reduces the share of firm expenses devoted to administrative costs among private foundations. These outcomes are robust to other estimating strategies, such as propensity-score matching and regression adjustment with inverse probability weights. Coefficients are smaller and less precise among large operating charities. I argue that my results weigh in favor of expanded donor standing to sue, at least for foundations. My findings also suggest that the agency costs of philanthropic organizations are substantial, which has implications for, among other policy debates, tax policies that encourage perpetual-lived philanthropy.

Keywords: Nonprofits, Donor Standing, Private Foundations, Agency Costs, Private Right of Action

JEL Classification: H32, K39, L30

Suggested Citation

Galle, Brian D., Valuing the Right to Sue: An Empirical Examination of Nonprofit Agency Costs (August 9, 2017). Journal of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2845033 or http://dx.doi.org/10.2139/ssrn.2845033

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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