Association for Public Policy Analysis & Management

We document significant bunching of nonprofit organizations at near-zero net assets and use this result to examine the financial dynamics of organizations as they approach insolvency. Bunching occurs across organizations of various ages and sizes, despite the fact that creditors cannot force nonprofit organizations into involuntary bankruptcy in the same manner as for-profits. The extent of bunching appears related to the revenue models of the organizations; donation-dependent organizations are much more likely to bunch than organizations that rely on program revenue or governmental grants. Empirical analysis of nonprofit financial data reported to the Internal Revenue Service shows that contributions from donors decline and the likelihood of failure rises among organizations with minimal net assets relative to their size. Together, the results suggest that nonprofit managers and donors regard the zero net assets threshold as a salient reference point in their assessment of nonprofits' viability.