The Effects of Local Newspaper Closures on Nonprofits’ Executive Compensation

Abstract

We examine the role of local newspapers in monitoring the nonprofit sector by testing how local newspaper closures affect nonprofits’ executive compensation levels. Although prior research establishes that local newspaper closures affect behavior of for-profits and municipalities, the unique governance and enforcement environment of nonprofits make it unclear whether and how closures of local newspapers will affect nonprofits’ executive compensation spending behavior. Consistent with local newspapers serving as an alternative monitoring mechanism within the nonprofit sector, we find that, following local newspaper closures, the levels of nonprofits’ executive compensation spending increases. This effect is less pronounced among nonprofits having audits and among those with better internal governance. Our results suggest that newspaper closures exacerbate agency problems among nonprofits particularly when alternative monitoring mechanisms of nonprofits are weaker.