Do Donors Discount Low-Quality Accounting Information?

Abstract

Prior research finds that donors reward nonprofits that report larger program ratios with more donations and that program ratios frequently are subject to intentional manipulation as well as unintentional errors. We examine how donors react to low-quality ratios. We find that the average donor discounts ratios that are inflated by only the simplest and most observable of methods. We then examine the effect of financial data availability on the average donor's ability to unravel inflated ratios by using the historical shift in data availability that occurred in 1997 and 1998. We find that donors began to discount ratios only after 1998. Finally, we examine whether the discount applied to program ratios varies across donor sophistication (measured as the percentage of fund balances with restrictions) and find that sophisticated donors apply incrementally larger discounts to inflated ratios and discount ratios that are inflated by more complex methods. JEL Classifications: G1; G18; G3; G38; L3; L30; L31; M4; M41; M43; M48 Data Availability: The data are available from public sources identified in this study.

Użyteczność informacji finansowych ze sprawozdań organizacji pożytku publicznego w ocenie ich dokonań przez darczyńców

“…Sytuacja ta ma jednak miejsce wyłącznie w przypadku oczywistych błędów [Yetman, Yetman 2013, s. 1053-1062. Z drugiej jednak strony, na co zwracają uwagę same organizacje, darczyńcy nie zawsze właściwie interpretują informacje o dokonaniach danej jednostki, oceniając głównie ilościowy, a nie jakościowy wymiar efektów [Thomson 2011, s. 65].…”

Using archival data sources to conduct nonprofit accounting research

“…8 We advise researchers to consider when it is appropriate to exclude all observations where fundraising expense equals zero. , Krishnan et al (2006), and Yetman and Yetman (2013) suggest plausible explanations for reporting zero fundraising (or administrative expenses). 9 One explanation is that the entity is affiliated with another that incurs and reports the bulk or all of the fundraising and administrative costs.…”

“…An exception is Yetman and Yetman (2013). They consider plausible explanations for fundraising expense to equal zero.…”

“…An exception is Yetman and Yetman (2013). They use the common codes to identify organizations whose primary focus is fundraising.…”

Large Sample Evidence of the Determinants of Nonprofit Monitoring Costs: A Resource Dependence Framework

“…Despite its potential usefulness to donors, its reliability is questioned in the literature in part due to the unaudited nature of the IRS Form 990, from which the ratio is generally derived, as various studies have documented both intentional and unintentional misstatement of this important ratio (Keating, Parsons, and Roberts 2008;Krishnan et al 2006;Jones and Roberts 2006;Tinkelman 1998). Furthermore, recent evidence suggests that donors may discount the program ratio when there are indicators of misstatement such as zero fundraising expenses reported (M. Yetman and R. Yetman 2013). Fundamentally, a program ratio that would otherwise be preferable (a percentage that nears 100 percent) may 21 In addition, the nonprofit literature emphasizes the importance of revenue diversification in this setting, giving us further support for disaggregating contributions into its three components.…”