Does Mandatory Disclosure Matter? The Case of Nonprofit Fundraising

Abstract

Do donors seek out potentially adverse information about organizations making fundraising appeals? Do they react when it is readily available? Do they draw negative inferences when critical information is not available? To answer these questions, we consider previously unexamined large-scale natural experiments involving U.S. charitable organizations—tax-exempt organizations that file Internal Revenue Service (IRS) Form 990. Using standard difference-in-differences designs, we find that donors penalize organizations with high fundraising costs when there is mandatory disclosure or involuntary disclosure by a third-party reporter. Organizations with lower fundraising costs fundraise more successfully in the presence of these disclosures. The contrast with donors’ behavior when such information is not available suggests that donors do not draw correct inferences when potentially consequential information is not disclosed. Disclose-on-request requirements, in contrast, apparently do not have any significant impact on donors’ or organizations’ behavior. We then sketch implications for the regulation of donations to charities and their modern cousins, such as crowdfunding and social enterprise organizations.

Donor Perceptions of Nonprofit Organizations’ Transparency: Conceptualization and Operationalization

“…Calls for transparency in the nonprofit sector have resonated widely (Barber et al, 2022;Bodem-Schrötgens & Becker, 2020;Chu & Luke, 2023), for three main reasons. First, considering the sector's societal welfare mission, advocacy for high moral standards in general (Willems & Faulk, 2019), and centrality of ethics and morality (Jeavons, 2016), transparency represents an essential ethical standard, irrespective of pragmatic outcomes in terms of stakeholder support (Becker, 2018).…”

“…Without access to transparent information, donors may hesitate to contribute or prefer to support other NPOs that offer greater transparency. Demands for transparency in the nonprofit sector also have been intensifying (Barber et al, 2022;Bodem-Schrötgens & Becker, 2020;Chu & Luke, 2023), for several reasons. In particular, NPOs generally are held to very high ethical standards (Becker, 2018), and as public funding has grown more unstable, these organizations must be transparent about their effectiveness in managing their operations and finances (Liket & Maas, 2015).…”

The regulatory breadth index: A new tool for the measurement and comparison of state‐level charity regulation in the United States

“…Several studies assess specific changes in legislation or specific requirements in individual states (e.g., Babenko et al, 2021; St Clair, 2016). Other recent studies involve a review of state‐level charity formation requirements and promotion of compliance (Amarante, 2021); a focus on the specific issue of state‐level regulation of nonprofit hospital and insurance conversions (Horwitz, 2002; Horwitz & Fremont‐Smith, 2005); and the relationship between state‐level fundraising disclosure requirements and donor behavior (Barber et al, 2021). In different cross‐jurisdictional studies, researchers have built an index measuring the breadth of charitable solicitation regulation (Dietz et al, 2017); analyzed the issue of bifurcated state‐level regulatory authority and its implications for future research (Lott et al, 2018); and compared certain state‐level regulatory requirements to state‐level staffing and resource issues while addressing potential enforcement implications (Adelstein & Boris, 2018; Galle, 2017).…”

The impact of financial management practices on accountability of Islamic social enterprise (ISE)

“…Moreover, financial disclosure is also used in evaluating the effectiveness and efficiency of ISE (Reck et al , 2019). Notably, ISE stakeholders, especially donors, tend to support ISEs with adequate financial information (Barber et al , 2021).…”