The capital structure of nonprofit organizations plays a crucial role in their sustainability and development. This article explores the extent to which revenue diversification is incorporated into the leverage decision. In addition, this study investigates whether government grants have an impact on the long-term liabilities of nonprofit organizations. A model of nonprofit borrowing is proposed and examined with a national sample of arts, culture, and humanities nonprofit organizations. Model estimates show that nonprofit organizations with higher degree of revenue diversification are more likely to issue debt, but do not necessarily have higher debt ratios. Arts organizations with more government financial support are also more likely to issue debt and to have higher leverage ratios.

The tax benefit, bankruptcy value, and pecking-order theories of corporate capital structure are discussed in context of nonprofit organizations. A bivariate probit model shows that coefficients differ between models meaning mortgages and tax-exempt bonds are not equivalent forms of debt. Organizations with proportionally more program revenues, contributions, total assets, total revenues, and executive compensation are more likely to have a mortgage. Nonprofits that rely on special event fund-raising or contributions have a lower probability of using bond financing. The use of debt is also influenced by the nature of the organization's mission as measured through the NTEE classification.

Using data from the California primary market, we fnd that on average Build America Bonds (BABs) have after-subsidy interest rates approximately 72 basis points lower than tax-exempt bonds, and the savings increase with bond maturity. The implied tax rate for the marginal municipal bond investor is 25 percent, which is also the neutral subsidy rate at which municipal bond issuers are indifferent between issuing tax-exempt bonds and BABs. Analysis of paired tax-exempt bonds and BABs issued by the same issuers on the same dates suggests a comparable implied tax rate and net after-subsidy savings of about 65 basis points.