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Financial reporting quality and price competition among nonprofit firms

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  • Jeremy Thornton
  • William Belski

Abstract

Donors increasingly rely on financial information reported by Internal Revenue Service (IRS) Form 990 to allocate donations among nonprofit firms. However, competition among nonprofits creates an incentive for managers to under-report management and fund-raising expenditures to make their firms appear relatively efficient. Increasingly, researchers suspect that information provided in the Form 990 may not accurately portray the true financial condition of nonprofit firms. Inaccurate price information weakens the ability of donors to promote efficiency and discipline excess among nonprofit managers. This article examines the reaction of donors to variation in Form 990 reporting quality. We find that donors reward nonprofit firms for investments in more accurate financial reporting. Additionally, higher quality financial information sharpens the ability of donor markets to discipline nonprofit firms by increasing price sensitivity. The primary implication of this study is that regulatory improvements in reporting quality could increase the ability of donor markets to serve as a viable governance mechanism for improving nonprofit efficiency.

Suggested Citation

  • Jeremy Thornton & William Belski, 2010. "Financial reporting quality and price competition among nonprofit firms," Applied Economics, Taylor & Francis Journals, vol. 42(21), pages 2699-2713.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:21:p:2699-2713
    DOI: 10.1080/00036840801964583
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    Citations

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    Cited by:

    1. Garth Heutel, 2014. "Crowding Out and Crowding In of Private Donations and Government Grants," Public Finance Review, , vol. 42(2), pages 143-175, March.
    2. Maged Albaz & Mohamed Mostafa Ali Albaz, 2019. "Core Perspectives Of Performance Measurement In Npos: In Search Of Accountability And Legitimacy," Economic Archive, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 3 Year 20, pages 3-16.
    3. Jeremy P. Thornton, 2014. "Flypaper Nonprofits," Public Finance Review, , vol. 42(2), pages 176-198, March.
    4. Debadutta K. Panda, 2019. "Competitive dynamics in not-for-profit organizations: evidence from India," Asia Pacific Journal of Management, Springer, vol. 36(4), pages 1251-1274, December.
    5. Hofmann, Mary Ann & McSwain, Dwayne, 2013. "Financial disclosure management in the nonprofit sector: A framework for past and future research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 61-87.
    6. Raphael Duguay, 2022. "The Economic Consequences of Financial Audit Regulation in the Charitable Sector," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1463-1498, September.

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