Operating reserves allow nonprofit organizations to smooth out imbalances between revenues and expenses, helping to maintain program output in the presence of fiscal shocks. We know surprisingly little about why nonprofits might save operating reserves and what factors explain variation between organizations' savings behavior. Findings suggest that operating reserves are reduced in the presence of concentrated public funds, access to debt, fixed assets, and endowment. However, size is not an important predictor, indicating that the lack of reserves is not limited to small nonprofit organizations but is instead a sectorwide issue. Significant numbers of nonprofits maintain no operating reserves at all. One potential explanation is that organizations discount the benefits of reserves because they are evaluated on spending, focusing instead on the “benefits of costs.” This preference for spending over reserving may also help explain the general lack of liquidity in the sector beyond operating reserves alone.

The static trade-off and pecking order capital structure theories are analyzed and applied to nonprofit organizations. In addition, this paper also considers how nonprofits adjust their leverage over time. The analyses consider the unique role of donor-restricted endowments in the decision to borrow, as well as different types of borrowing by nonprofits. The results indicate that nonprofit capital structure choices are best explained using the pecking order theory, in which internal funds are preferred over external borrowing. Further, nonprofit endowment is not found to increase leverage. Despite the unambiguous findings across varying definitions of leverage, the results also suggest that a "modified pecking order" is a more apt descriptor of nonprofit behavior.

Does current accumulated wealth by nonprofi t organizations infl uence contributions from individuals?Existing research demonstrates that fi nancial reserves aid program continuity during economic downturns. Yet donors, charity watchdogs, and policy makers voice concern about accumulated wealth in nonprofi ts. Th is empirical analysis examines whether the expected negative relationship occurs when donors perceive accumulated wealth as excessive. Th e results support the conclusion that future contributions are negatively aff ected when wealth levels are deemed excessive. Nonprofi t managers concerned that accumulated wealth will diminish donations should consider fi nancial strategies that will allow their organizations to build modest-but not excessive-reserves.

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