Using Hazard Rate Analysis to Examine Nonprofit Terminations

• In Event: Nonprofit Executive Compensation and Entity Termination

Abstract

Although a significant body of research has examined the financial failures of for-profit corporations, no prior study has attempted to construct a model to predict the termination of nonprofit organizations. Nonprofit firms are entities which are organized and operated for educational and charitable purposes and are afforded preferential tax treatment under Internal Revenue Code Section 501(c)(3). While these organizations lack owners, understanding and predicting the bankruptcy or termination of these organizations is nonetheless important to a variety of constituencies ranging from auditors and donors to the communities and populations they serve. Utilizing data from Internal Revenue Service Form 990, Return of Organization Exempt from Income Tax for the years 2000 through 2007, this paper uses hazard rate analysis to develop a model to forecast the termination of nonprofit organizations using accounting information and ratios.

Authors

• Kathryn Yeaton, Ramapo College-New Jersey

• Matthew Yeaton, New York Federal Reserve