Management Accounting Section Midyear Meeting

The Relation between Cash Reserves, Governance, and Donations in Nonprofit Organizations

• In Event: Social Responsibility

Abstract

Cash reserves enable nonprofit organizations to absorb financial shocks and meet unexpected demand for charitable services. Large cash holdings, however, provide managers with an opportunity to use funds to accrue private benefits, and excessive cash levels may negatively influence donors’ contribution decisions. While an extensive literature examines cash holdings in for-profit firms, few accounting studies address the determinants and consequences of cash reserves in nonprofits (Core et al. 2006; Gore 2009). This study investigates whether corporate governance mechanisms, which are designed to limit managers’ opportunistic behavior, are associated with NP managers’ ability to build cash reserves. It also examines how excessive cash reserves influence donors’ decisions to contribute to a charity. Results indicate that cash reserves are positively associated with three proxies for corporate governance (board size, board independence, and board monitoring intensity) and negatively associated with the presence of an internal control deficiency. We also find that excessive cash holdings are negatively associated with future donations, after controlling for governance. Our results are robust to alternative specifications designed to address endogeneity. Accordingly, the findings suggest that stakeholders allow better governed nonprofits to maintain larger cash reserves, and donors withhold contributions from charities that are likely to reserve their donations for future use rather than deploy them in the current period. This study contributes to research addressing the role of governance in controlling nonprofit managers’ actions and provides new evidence on donors’ motivations for contributing to a charity.

Authors

• Mina Pizzini, Texas State University

• Mikhail Sterin, Texas State University