The Shock of Evaluation: Examining the Impact of Efficiency Metrics on Nonprofits’ Reporting and Revenues

Abstract

Despite the constant battle over financial ratios, the existing literature has failed to converge on how these overhead expenditures actually impact nonprofit revenues and behavior. With improved analysis, this paper addresses the issues through two models that more accurately account for the mechanism of third-party ratings in the overhead debate. Using data from Charity Navigator and the IRS Form 990, a series of fixed effects models assess how third-party ratings impact how nonprofit organizations report their administrative costs and how both ratings and overhead ratios impact private contributions and grants. Most notably, the results show that after the expansion of Charity Navigator in 2011, firms report overhead ratios approximately 9.2 percent lower when they become eligible to be rated. Regarding revenues, within firm changes to overhead ratios have no impact on either rated or non-rated firms. While, for rated firms, controlling for overhead ratios, third party ratings have a positive effect on public support revenues.

Keywords: Nonprofit Organizations, Charitable Giving, Expense Ratios, Financial Reporting, Charity Ratings

JEL Classification: D64, L31