Determinants and Consequences of Nonprofit Debt Ratings

• In Event: Municipal and Nonprofit Debt

Abstract

Using a sample of over 500 nonprofit organizations who received a debt rating from either Moody’s or S&P between 1993 and 2010, we find evidence that donors incorporate the signal provided by these ratings in their donation decision. Consistent with prior literature which suggests that institutional differences such as the lags in financial statement disclosures as well as costs associated with information gathering account for the debt rating value relevance in the municipal bond market (Ingram et al 1983), we find that the nonprofit sector is equally afflicted by these information gathering hurdles, and therefore donors also find value in nonprofit debt ratings.
We also make important initial understandings related to the types of nonprofit organizations that receive a debt rating, documenting that rated organizations appear to be younger and smaller, consistent with a greater need to establish credibility with potential investors. We believe these are interesting first steps in understanding the types of nonprofit organizations that receive debt ratings and well as the effect of this information signal in the nonprofit sector.

Authors

• Jennifer J Gaver, University of Georgia

• Erica Harris, Rutgers University - Camden

• Mary Soyun Im, University of Alabama-Birmingham