Association for Public Policy Analysis & Management

This paper empirically examines the effect of having a parent organization on the financial health of nonprofit subsidiaries, a link that has been largely unexplored in nonprofit research. It builds upon business research on parent-subsidiary relations providing insight into how organizational structures influence nonprofit financial management. The main hypothesis of this paper is that subsidiaries have better financial health than their non-subsidiary peers. The analysis draws on a rich data set from DataArts (2011-2014) that covers 11,328 nonprofit arts and cultural organizations. This paper also offers a new application of the resource dependency theory in the nonprofit setting by explaining how parents’ resources could affect the financial performance of their subsidiaries.

The business literature on parent-subsidiary relation suggests that parent transfers have a positive impact on subsidiaries’ financial performance (Delios & Beamish, 2001; Fang, Jiang, Makino, & Beamish, 2010). Transfers, tangible or intangible including knowledge, human resources, and information, help in overcoming shortages in the institutional environment (Luo, 2003). The literature on nonprofit finance focuses on factors that affect nonprofits financial stability (and its inverse, vulnerability). Tuckman and Chang (1991) define a nonprofit as financially vulnerable “if it is likely to cut back its service offerings immediately when it experiences a financial shock” (Tuckman & Chang 1991, 445). They initially develop four indicators that characterize financially vulnerable nonprofit organizations which we use in this study: few revenue streams, low administrative expense ratios, low operating margins, and insufficient equity balance (Tuckman & Chang, 1991).

This paper draws on the theory of resource dependency to explain the parent-subsidiary relationship in the nonprofit context. Resource dependency explains how parent-subsidiary relations help in reducing external resource dependency (Luo, 2003). A situation of dependency usually arises when subsidiaries rely on irreplaceable resources controlled by local possessors (Pfeffer and Salancik, 1978). Therefore, if a subsidiary can reduce such dependency by utilizing its parent resources, the economic risks or transactional costs associated with resource acquisition will be substantially mitigated (Kobrin, 1982). Further, parents’ resources will help subsidiaries overcome unexpected fiscal challenges and achieve better financial health.

The sample for this paper covers the 501c3 nonprofit arts and cultural organizations that filed DataArts forms between 2011 and 2014. The independent variable is whether nonprofits have a parent organization and the dependent variables are revenue concentration, equity balance, operating margins, and administrative cost ratio. The empirical model controls for an organization’s age, size, government grants, and program revenue. The dependent variable is regressed using ordinary least squares.

This paper covers a distinct gap in the literature. Nonprofits have been increasingly creating subsidiaries but not much research has been done on parent-subsidiary links. It also contributes theoretically by providing a new application of resource dependency theory and an understanding of how parents’ resources could affect the financial performance of their subsidiaries. Practical implications include insights into how to best leverage parental resources especially the intangible ones to enhance subsidiaries independence, increase their managerial and financial efficiency, and improve their programs.