Nonprofit expense management and the zero-profit threshold

Purpose - In a wide variety of settings, individuals target round-numbered thresholds, relaxing effort when they are out of reach. This paper aims to investigate whether this phenomenon occurs in nonprofits as well. Design/methodology/approach - The paper empirically examines nonprofits’ propensity to cut expenses relative to the attainability of the zero-profit threshold. Findings - This paper finds nonprofit firms are more likely to cut expenses when faced with small expected losses than with larger losses, and this pattern varies predictably with incentives to reach the zero-profit threshold. Research limitations/implications - This suggests managers are motivated by desire to reach the zero-profit threshold rather than to improve firms’ economic situations, as the propensity to cut expenses is lower when the threshold is out of reach. Social implications - Additionally, the results suggest that even the lack of explicit profit motive may not quell earnings management behavior. Originality/value - These results begin to close the gap in our understanding of expense management in nonprofit firms, showing how operating expenses can be used to manage earnings.