The Spend-Save Decision: An Analysis of How Charities Respond to Revenue Changes
30 Pages Posted: 10 Feb 2005 Last revised: 13 May 2012
Date Written: February 1, 2012
We study how charities adjust spending when revenues change. Understanding the decision to spend or save revenues provides insights into management behavior and resource allocations. Our results indicate that, on average, the marginal change in overall spending is substantially less than the marginal change in revenue, indicating that charities smooth spending. Charities save a substantial portion of additional revenues and appear to mitigate reductions in revenues by using past savings, especially amounts saved in the previous year. We also find evidence that charities anticipate revenue declines and save for that purpose. Charities with fewer constraints, such as those with larger net assets and those with revenues from sources less likely to impose revenue spending restrictions, do more smoothing by adjusting spending less.
Keywords: Charity, nonprofit, efficiency, program ratio, marginal spending
JEL Classification: H39, L31, M41, D82, G34
Suggested Citation: Suggested Citation