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Assessing Financial Vulnerability in the Nonprofit Sector

41 Pages Posted: 12 Jan 2005  

Elizabeth K. Keating

Harvard University - John F. Kennedy School of Government

Mary Fischer

University of Texas at Tyler - College of Business & Technology

Teresa P. Gordon

University of Idaho

Janet S. Greenlee

University of Dayton - School of Business Administration

Date Written: January 2005

Abstract

Effective nonprofit governance relies upon understanding an organization's financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang's or Altman's in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson's model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.

Keywords: Financial vulnerability, financial distress, bankruptcy prediction, nonprofit

JEL Classification: L31, M41

Suggested Citation

Keating, Elizabeth K. and Fischer, Mary and Gordon, Teresa P. and Greenlee, Janet S., Assessing Financial Vulnerability in the Nonprofit Sector (January 2005). KSG Working Paper No. RWP05-002; Hauser Center for Nonprofit Organizations Paper No. 27. Available at SSRN: https://ssrn.com/abstract=647662 or http://dx.doi.org/10.2139/ssrn.647662

Elizabeth K. Keating (Contact Author)

Harvard University - John F. Kennedy School of Government ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-9856 (Phone)
617-495-8963 (Fax)

Mary Fischer

University of Texas at Tyler - College of Business & Technology ( email )

3900 University Boulevard
Tyler, TX 75701
United States
903-566-7433 (Phone)
903-566-7211 (Fax)

Teresa P. Gordon

University of Idaho ( email )

College of Business & Economics
P O Box 443161
Moscow, ID 83944-3161
United States
208-885-8960 (Phone)
208-885-6296 (Fax)

Janet S. Greenlee

University of Dayton - School of Business Administration ( email )

Dayton, OH 45469
United States
937-229-4790 (Phone)
937-229-2270 (Fax)

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