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The Adoption and Use of the Hirschman–Herfindahl Index in Nonprofit Research: Does Revenue Diversification Measurement Matter?

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Abstract

Since its introduction by Tuckman and Chang (Nonprofit Volunt Sector Q 20(4):445–460, 1991), the Hirschman–Herfindahl Index (HHI) has been widely adopted into the nonprofit literature as a precise measure of revenue concentration. This widespread adoption has been characterized by diverse composition, with the HHI’s calculation being largely determined by the nature of the available data and the degree to which it contained disaggregated measures of revenue. Using the NCCS 990 Digitized Data, we perform an acid test on whether different HHI measures yield significantly different results. Four measures of revenue concentration—an aggregated measure based on three revenue streams, an aggregated measure separating government grants from other contributions, a more nuanced measure based on seven revenue streams, and a fully disaggregated measure based on thirteen revenue streams—are used to predict two dominant nonprofit financial health dimensions: financial volatility and financial capacity. Overall, our results show that aggregation in HHI measurement matters; aggregation often downplays relationships by influencing the significance levels and magnitudes of estimates in a non-trivial way.

Résumé

Depuis sa présentation par Tuckman et Chang (1991), l’indice de Herfindahl–Hirschman (IHH) a été largement adopté dans la documentation sur le secteur à but non lucratif comme une mesure précise de la concentration du revenu. Cette généralisation a été caractérisée par une composition diverse, dont le calcul de l’IHH a été en grande partie déterminé par la nature des données disponibles et le degré auquel il contenait des mesures de revenus ventilées. En utilisant les données numérisées NCCS 990, nous effectuons une épreuve décisive pour savoir si les différentes mesures de l’IHH produisent des résultats sensiblement différents. Quatre mesures de concentration de revenu — une mesure agrégée issue de trois sources de revenus, une mesure agrégée distinguant les subventions gouvernementales des autres contributions, une mesure plus nuancée basée sur sept sources de revenus et une mesure complètement désagrégée basée sur treize sources de revenus — servent à prévoir deux dimensions dominantes de la santé financière du secteur à but non lucratif : la volatilité financière et la capacité financière. Dans l’ensemble, nos résultats montrent que l’agrégation de la mesure de l’IHH est importante et que l’agrégation minimise souvent les relations en influençant les niveaux de signification et l’importance des estimations d’une manière non négligeable.

Zusammenfassung

Seit seiner Einführung durch Tuckman und Chang (1991) wurde der Hirschman–Herfindahl-Index (HHI) weitgehend in der Literatur zu gemeinnützigen Organisationen als eine präzise Kennzahl zur Messung der Einnahmenkonzentration übernommen. Diese verbreitete Anwendung zeichnete sich durch eine vielfältige Zusammensetzung aus, wobei die Ermittlung des HHI hauptsächlich vonder Beschaffenheit der verfügbaren Daten und dem Maß, in dem disaggregierte Messungen der Einnahmen enthalten waren, abhing. Wir führen unter Verwendung der NCCS 990 Digitized Data [vom US-amerikanischen National Center for Charitable Statistics bereitgestellte digitalisierte Daten über Steuererklärungen gemeinnütziger Organisationen auf dem Formular 990] einen Acid-Test dazu durch, ob unterschiedliche HHI-Messungen zu wesentlich unterschiedlichen Ergebnissen führen. Man verwendet hierzu vier Messungen der Einnahmenkonzentration - eine aggregierte Messung beruhend auf drei Einnahmequellen, eine aggregierte Messung, bei der Regierungszuschüsse von anderen Beiträgen getrennt werden, eine differenziertere Messung beruhend auf sieben Einnahmequellen und eine vollständig disaggregierte Messung beruhend auf 13 Einnahmequellen -, um zwei dominante Bereiche der finanziellen Solidität gemeinnütziger Organisationen vorherzusagen: die finanzielle Volatilität und die finanzielle Kapazität. Insgesamt zeigen unsere Ergebnisse, dass die Aggregation bei der HHI-Messung wichtig ist; die Aggregation spielt Beziehungen oftmals herunter, indem sie die Bedeutung und das Ausmaß von Schätzungen auf nicht unerhebliche Weise beeinflusst.

Resumen

Desde su introducción por Tuckman y Chang (1991), el Índice Hirschman–Herfindahl (HHI) ha sido adoptado ampliamente en el material publicado sobre entidades sin ánimo de lucro como una medición precisa de la concentración de ingresos. Esta amplia adopción se ha caracterizado por diversas composiciones, estando determinado el calculo de HHI por la naturaleza de los datos disponibles y el grado en el que contenía mediciones de ingresos desagregadas. Utilizando los Datos Digitalizados de NCCS 990, realizamos una prueba ácida sobre si mediciones diferentes de HHI ofrecen resultados diferentes de manera significativa. Se utilizan cuatro mediciones de la concentración de ingresos - una medición agregada basada en tres corrientes de ingresos, una medición agregada que separa las subvenciones gubernamentales de otras aportaciones, una medición más matizada basada en siete corrientes de ingresos, y una medición totalmente desagregada basada en trece corrientes de ingresos - para predecir dos dimensiones dominantes de la salud financiera de las entidades sin ánimo de lucro: la volatilidad financiera y la capacidad financiera. En general, nuestros resultados muestran que sí importa la agregación de la medición HHI; la agregación a menudo quita importancia a las relaciones influyendo en los niveles de significación y en las magnitudes de las estimaciones de una forma no trivial.

摘要

自从被Tuckman and Chang(1991)引用后,赫尔芬达-赫希曼指数(HHI)便被广泛应用于非营利领域,作为精准测量收入集中度的工具。这种广泛的应用呈现多样化态势,计算赫尔芬达-赫希曼指数在很大程度上由可用数据的性质及其分解测量收入的程度决定。通过使用NCCS990数字化数据,我们针对不同的赫尔芬达-赫希曼指数测量方法是否产生明显不同的结果进行了酸性测试。四种收入集中度测量方法—基于三个收入源的分解测量法,分离政府救助和其他出资的分解测量法,基于七个收入源的更加细致入微的测量法,以及基于十三个收入源的完全分解测量法—被用于预测两个主要的非营利组织财务健康方面:财务波动性和财务承受力。总体而言,我们的结果显示,分解测量赫尔芬达-赫希曼指数确有重大影响,分解测量会对预测的重要级别和重要性产生重大影响,但对彼此关系不够重视。

ملخص

منذ تقديمه عن طريق (Tuckmanو Chang) (1991)، إعتمد مؤشر(Hirschman-Herfindahl (HHI))على نطاق واسع في الأدب الغير ربحي كمقياس دقيق لتركيز الإيرادات. وقد إتسم هذا الإتخاذ الواسع من خلال التركيبة المتنوعة، مع حساب (HHI) ليتم تحديدها إلى حد كبيرعن طريق طبيعة البيانات المتاحة والدرجة التي تتضمن تدابير مفصلة للإيرادات. بإستخدام المركز الوطني للإحصاء الخيري (NCCS) البيانات الرقمية، يمكننا إجراء الإختبار الحاسم على ما إذا كانت قياسات(HHI) المختلفة تسفرعن نتائج مختلفة إلى حد كبير. أربعة مقاييس لتركيز الإيرادات - إجراءات مجمعة على أساس ثلاثة مصادر للدخل، هي مقياس تجميع فصل المنح الحكومية من مساهمات أخرى، وهو مقياس أكثر دقة إستنادا˝ إلى سبعة مصادر للدخل، مقياس مصنف تم حسابه بالكامل على أساس ثلاثة عشر تيارات الإيرادات - يتم استخدامه للتنبؤعلى اثنين مهيمنين لأبعاد الصحة المالية الغير ربحي: التقلبات المالية والقدرة المالية. بشكل عام، تظهر نتائجنا أن التجميع في قياس (HHI) مهم؛ التجميع غالبا˝ ما يقلل من أهمية العلاقات من خلال التأثير على أهمية المستويات ومقادير التقديرات بطريقة غير تافهة.

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Notes

  1. The use of the HHI in economics has been associated with other concerns, not in terms of its internal consistency, but the lack of confidence in using the index for policy making purposes as an official measure of business concentration. For instance, Mandelbrot (1997) raised concerns about the HHI’s lack of theoretical motivation, statistical character, and confidence intervals which exposes the index to guesswork in terms of interpretation (Djolov 2011). “[O]ne needs to know whether variations in the index are real, [that is], significant or trivial” (Djolov 2011, 6).

  2. The 13 revenue line items include; direct public support, indirect public support, government grants, program revenue, membership dues, interest and savings, dividends, other investment income, net rental income, net gain on sale, net income from special events, net profit from selling inventory, and other revenue.

  3. As an alternative form, the HHI has also been calculated as an absolute measure of concentration equal to the sum of the squared portion of total revenue [Sum of (Revenue it /Total Revenues)2 of organization i in year t], with a higher HHI denoting increased revenue concentration.

  4. Although the results based on the comprehensive HHI measure are consistent with Chikoto and Neely’s (2014) result, the full model in this research uses a non-identical sample. The sample used here is more robust than that used by these authors.

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Authors and Affiliations

  1. University of Wisconsin – Milwaukee, Bolton Hall 610, P.O. Box 413, Milwaukee, WI, 53201, USA

    Grace L. Chikoto

  2. College of Business Administration, Marquette University, Straz Hall, 308, P.O. Box 1881, Milwaukee, WI, 53201, USA

    Qianhua Ling

  3. University of Wisconsin – Milwaukee, Lubar Hall N320, 3202 North Maryland Avenue, Milwaukee, WI, 53211, USA

    Daniel Gordon Neely

Authors
  1. Grace L. Chikoto
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  2. Qianhua Ling
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  3. Daniel Gordon Neely
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Corresponding author

Correspondence to Grace L. Chikoto.

Appendix

Appendix

Variable Definitions

laglnvoltperc:

Lag of the natural log of volatility percentage

laglnexpenses:

Lag of the natural log of total expenses

lRDAggregated :

Lag of the HHI measure with three aggregated sources

lRDFourSource :

Lag of the HHI measure with four aggregated sources

lRDSevenSource :

Lag of the HHI measure with seven aggregated sources

lRDComprehensive :

Lag of the HHI measure with thirteen sources

ladmineff:

Lag of the ratio of administrative expenses to total expenses

lage:

Lag of age defined as the current fiscal year minus the ruling year

lfundeff:

Lag of the ratio of fundraising expenses to total expenses

laglnnetassets:

Lag of the natural log of total net assets

ltotalmargin:

Lag of the ratio of excess(deficit) income divided by total revenue

ldebtmargin:

Lag of the ratio of total liabilities to total assets

donative:

1 if the ratio of donations to total revenue is greater than 50 %

donative98:

1 if the ratio of donations to total revenue is greater than 50 % in 1998

revenue98:

Total revenues in 1998

adminexpratio98:

Ratio of administrative expenses to total expenses in 1998

age98:

1998 Age (fiscal year–ruling year)

frexpratio98:

Ratio of fundraising expenses to total expenses in 1998

compratio98:

=Ratio of officer compensation to total expenses in 1998

RDAggregated-98 :

1998 HHI measure with three aggregated sources

RDFourSource-98 :

1998 HHI measure with four aggregated sources

RDSevenSource-98 :

1998 HHI measure with seven aggregated sources

RDComprehensive-98 :

1998 HHI measure with thirteen sources

Additional controls:

dummy variables for state of location and NTEE Major Group Code (A to Z)

See Tables 5, 6, 7, 8, 9, 10, 11, and 12.

Table 5 Regression model with the natural log of volatility percentage
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Table 6 Regression model with 5−year revenue growth
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Table 7 Regression model with the natural log of volatility percentage as the dependent variable and organizations with At least 2 donative funding sources and fewer than 2 earned income and investment funding sources
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Table 8 Regression model with the natural log of volatility percentage as the dependent variable and organizations with at least 2 earned funding sources and fewer than 2 donative income and investment funding sources
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Table 9 Regression model with the natural log of volatility percentage as the dependent variable and organizations with at least 2 investment funding sources and fewer than 2 earned income and donative funding sources
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Table 10 Regression model with 5-year revenue growth as the dependent variable and organizations with at least 2 donative funding sources and fewer than 2 earned income and investment funding sources
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Table 11 Regression model with 5-year revenue growth as the dependent variable and organizations with at least 2 earned funding sources and fewer than 2 donative income and investment funding sources
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Table 12 Regression model with 5-year revenue growth as the dependent variable and organizations with at least 2 investment funding sources and fewer than 2 earned income and donative funding sources
Full size table

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Chikoto, G.L., Ling, Q. & Neely, D.G. The Adoption and Use of the Hirschman–Herfindahl Index in Nonprofit Research: Does Revenue Diversification Measurement Matter?. Voluntas 27, 1425–1447 (2016). https://doi.org/10.1007/s11266-015-9562-6

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