Active Monitors and Violations of the Bright-Line Rules: Evidence from Chinese Charitable Foundations

• In Event: Nonprofit Governance

Abstract

The Regulations on the Administration of Foundations (RAF) in China set up bright-line rules on program ratio for charitable foundations. Based on resource dependence theory, we postulate that sophisticated fund providers, institutional donors and oversea donors are active monitors and they could significantly lower the probability of violations of these rules. Consistent with our hypotheses, the results generally suggest that the probability of violation is negatively related to sophisticated fund providers, defined as the ratio of restrictive donation. The evidence also suggest that sophisticated donors may effectively lower the probability of rule violation through improving transparency. And the similar monitoring effect of institutional donors and oversea donors only exist in non-public foundations. Further investigation evidence that non-public foundations with lower audit quality are more effectively monitored by these sophisticated donors, suggesting that the substitute effect of high quality audit dominates the complementary effects in Chinese charitable foundations.

Author

• Qingmei Xue, Saginaw Valley State University