Societal Trust and the Economic Behavior of Nonprofit Organizations

• In Event: Government, Audit and XBRL

Abstract

We study how societal trust impacts the economic behavior of nonprofit organizations. Although prior studies reveal trust has a positive impact on the economic behavior of for-profit firms, the institutional differences between the two organization types make it unclear whether trust plays a similar role in nonprofits. Our results show that nonprofits operating in higher trust areas are more likely to overspend on administrative expenses. This positive relationship between trust and overspending is primarily driven by service-type nonprofits, as opposed to public charities. Moreover, within service-type nonprofits, we find that the positive trust-administrative overspending association is most prevalent in situations of weaker monitoring or governance. Additional tests show trust has a similar impact on excess compensation and abnormal accruals in service-type nonprofits. Overall, our findings suggest that trust may prompt nonprofit managers, particularly in service oriented organizations, to engage in opportunistic behavior that may be exacerbated by weaker forms of oversight.

Authors

• Robert Felix, University of Baltimore

• Jan L Williams, University of Baltimore

• Mikhail Pevzner, University of Baltimore

• Greg Gaynor, University of Baltimore