Panel Paper: The Role of Revenue Type in the Growth of Young Not-for-Profits: A Dynamic Analysis

Thursday, November 6, 2014 : 10:35 AM
Dona Ana (Convention Center)

*Names in bold indicate Presenter

Elizabeth A.M. Searing, Georgia State University
The theoretical trade-off between profit and growth in small commercial enterprises has endured for fifty years, and we find a similar debate taking shape in the nonprofit financial literature.  Managers do appear to seek the accumulation of unrestricted net assets (UNA) in order to hedge risk and communicate signals of health (Calabrese, 2012); however, this logic implies that very dollar saved today will translate into greater purchasing power for services in a later period, which found support in Ramirez (2011).

Our overall research question, therefore, is whether the accumulation of UNA encourages the overall growth of nonprofit enterprises.  The differences between the commercial concept of profit and the nonprofit concept of UNA are many, but there are several elements in common: the role of managerial discretion, the potential to offset risk of an adverse shock, and the role of time discounting in deciding whether to spend or save in the current time period in order to maximize their overall output and impact. 

Using total expenditures as the basis for our measure of nonprofit growth rate, we first expect to find that there is a positive relationship between the growth of UNA and nonprofit growth; as in Calabrese (2012), the retention of earnings implies a level of organizational slack which signals economic health.  Second, we expect to find that small nonprofits grow more quickly than larger ones; this is a negation of the popular concept from the for-profit literature called “Gibrat’s Law,” which states that the size and growth are unrelated.  Third, we expect that the characteristics of the dominant funding type will impact growth rates, with enterprises which rely primarily on market mechanisms to deliver services having faster growth rates than donative organizations.  This is due to both donative revenues often being volatile and market-oriented production potentially rewarding efficiency gains.  However, we expect the presence of taxable business income to hinder growth, following the literature which suggests such activities exist only so far as is necessary to support mission-related expenditure.  Finally, we expect the existence of high levels of non-current assets to be a deterrent from growth. 

This study uses the panel NCCS digitized database of nonprofit tax records to test these hypotheses; though limited in years, the digitized data offers the financial detail needed.  Two models are specified.  First, a fixed effects estimation will address any potential omitted variable issues, including firm-specific effects; additionally, we address potential endogeneity with the use of multiple years of lags.  However, it is possible that endogeneity and autocorrelation issues exist that are not fully addressed by the lags, so we also employ a generalized method of moments (GMM) estimation using the Arellano/Bover estimation.  The results of this study should inform decision-making for nonprofit managers and expand the literature regarding the determinants of nonprofit growth.


Calabrese, T. D. (2012). The Accumulation of Nonprofit Profits: A Dynamic Analysis. Nonprofit and Voluntary Sector Quarterly. doi: 10.1177/0899764011404080

Ramirez, A. (2011). Nonprofit Cash Holdings: Determinants and Implications. Public Finance Review, 39(5), 653-681. doi: 10.1177/1091142110381638