Multiple Information Signals in the Market for Charitable Contributions

• In Event: Not-for-Profit Accounting and Accounting for U.S. Hospitals

Abstract

We find robust evidence which indicates that nonprofit donors incorporate third party rating information into their decision to give. Specifically, using a sample of over 3,800 nonprofit organizations rated by the three largest charity rating organizations (Charity Navigator, BBB, and AIP) matched with unrated organizations based on size and industry, we find that rated organizations have 73% higher total contributions than unrated organizations. We also find that total contributions are increasing in the number of ratings received, and that receiving a good rating is associated with higher total contributions over nonrated organizations, and while poor ratings are also positively related to total contributions, the relationship is not as strong. Additionally we find that organizations rated by Charity Navigator receive the most total contributions, followed by BBB and then AIP. Finally, we also document results consistent with larger total contributions accruing to charities that receive consistent ratings.
Given the limited amount of credible information readily available to donors in the market for charitable giving, we believe this study makes an important contribution to understanding the role of information provided by nonprofit rating agencies. Using ratings provided by the three prominent US charity rating agencies as credible signals of charity success, we find support for the applicability of the information production hypothesis in the market for charitable contributions; concluding that these charitable rating agencies are successful at generating credible signals of quality useful in the donation decision.

Authors

• Erica Harris, Rutgers, The State University of New Jersey, Camden

• Daniel Gordon Neely, University of Wisconsin–Milwaukee