Restricted Revenues and Nonprofit Service Delivery: The Roles of Financial Discretion

Abstract

The proposition that restricted revenues inhibit nonprofit service delivery by reducing their financial discretion has accumulated in the academic literature but has not been empirically tested. Using a sample of arts and culture nonprofits in the USA, this study examines whether the proposition is upheld through a resource dependence lens. The results suggest that restricted revenues limit nonprofits’ efforts to seek other sources of revenue, which leads to a decrease in nonprofit service delivery. The results also suggest that this indirect effect holds and is even more pronounced in donative and performing arts nonprofits. Restricted revenues, however, do not curb nonprofits’ administrative expenses, and an increase in administrative expenses does not lead to an increase in nonprofit service delivery. The prevailing notion that restricted revenues force nonprofits to shift their cost structures away from administrative expenses may need to be reconsidered. Overall, this study partially supports the proposition that financial discretion plays a role in explaining the negative relationship between restricted revenues and nonprofit service delivery.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. 1.

    The results and details of the checks are available upon request.

  2. 2.

    This study conducts the robustness checks on the indirect effect of overhead expenses. The results persist.

References

  1. Balsam, S., & Harris, E. E. (2013). The impact of CEO compensation on nonprofit donations. The Accounting Review, 89(2), 425–450.

    Google Scholar 

  2. Barman, E. (2008). With strings attached: Nonprofits and the adoption of donor choice. Nonprofit and Voluntary Sector Quarterly, 37(1), 39–56.

    Google Scholar 

  3. Berrett, J. L., & Holliday, B. S. (2018). The effect of revenue diversification on output creation in nonprofit organizations: A resource dependence perspective. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 29(6), 1190–1201.

    Google Scholar 

  4. Brandt, R. (1990). More givers are adding strings: Donors want a say in just where charities spend their money. Business Week, 5, 34.

    Google Scholar 

  5. Brooks, A. C. (2004). The effects of public policy on private charity. Administration & Society, 36(2), 166–185.

    Google Scholar 

  6. Cameron, K. (1986). A study of organizational effectiveness and its predictors. Management Science, 32(1), 87–112.

    Google Scholar 

  7. Carroll, D. A., & Stater, K. J. (2008). Revenue diversification in nonprofit organizations: Does it lead to financial stability? Journal of Public Administration Research and Theory, 19(4), 947–966.

    Google Scholar 

  8. Charles, Cleopatra, & Kim, M. (2016). Do donors care about results? An analysis of nonprofit arts and cultural organizations. Public Performance & Management Review, 39(4), 864–884.

    Google Scholar 

  9. Chikoto, G. L., Ling, Q., & Neely, D. G. (2016). The adoption and use of the Hirschman-Herfindahl Index in nonprofit research: Does revenue diversification measurement matter? VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 27(3), 1425–1447.

    Google Scholar 

  10. Chikoto, G. L., & Neely, D. G. (2014). Building nonprofit financial capacity: The impact of revenue concentration and overhead costs. Nonprofit and Voluntary Sector Quarterly, 43(3), 570–588.

    Google Scholar 

  11. Coupet, J., & Berrett, J. L. (2019). Toward a valid approach to nonprofit efficiency measurement. Nonprofit Management and Leadership, 29(3), 299–320.

    Google Scholar 

  12. de Andres-Alonso, P., Garcia-Rodriguez, I., & Romero-Merino, M. E. (2016). Disentangling the financial vulnerability of nonprofits. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 27(6), 2539–2560.

    Google Scholar 

  13. Foster, W., & Fine, G. (2007). How nonprofits get really big. Stanford Social Innovation Review, 5(2), 46–55.

    Google Scholar 

  14. Froelich, K. A. (1999). Diversification of revenue strategies: Evolving resource dependence in nonprofit organizations. Nonprofit and Voluntary Sector Quarterly, 28(3), 246–268.

    Google Scholar 

  15. Frumkin, P., & Keating, E. K. (2011). Diversification reconsidered: The risks and rewards of revenue concentration. Journal of Social Entrepreneurship, 2(2), 151–164.

    Google Scholar 

  16. Frumkin, P., & Kim, M. T. (2001). Strategic positioning and the financing of nonprofit organizations: Is efficiency rewarded in the contributions marketplace? Public Administration Review, 61(3), 266–275.

    Google Scholar 

  17. Galaskiewicz, J., & Bielefeld, W. (1998). Nonprofit organizations in an age of uncertainty: A study of organizational change. Piscataway: Transaction Publishers.

    Google Scholar 

  18. Galaskiewicz, J., Bielefeld, W., & Dowell, M. (2006). Networks and organizational growth: A study of community based nonprofits. Administrative Science Quarterly, 51(3), 337–380.

    Google Scholar 

  19. Gneezy, U., Keenan, E. A., & Gneezy, A. (2014). Avoiding overhead aversion in charity. Science, 346(6209), 632–635.

    Google Scholar 

  20. Greene, W. H. (2003). Econometric analysis. India: Pearson Education.

    Google Scholar 

  21. Gregory, A. G., & Howard, D. (2009). The nonprofit starvation cycle. Stanford Social Innovation Review, 7(4), 49–53.

    Google Scholar 

  22. Grønbjerg, K. A. (1992). Nonprofit human service organizations: Funding strategies and patterns of adaptation. In Y. Hasenfeld (Ed.), Human services as complex organizations (pp. 73–97). Newbury Park, CA: SAGE.

    Google Scholar 

  23. Grønbjerg, K. A. (1993). Understanding nonprofit funding: Managing revenues in social services and community development organizations. San Francisco: Jossey-Bass Inc Pub.

    Google Scholar 

  24. Hager, M. A. (2001). Financial vulnerability among arts organizations: A test of the Tuckman-Chang measures. Nonprofit and Voluntary Sector Quarterly, 30(2), 376–392.

    Google Scholar 

  25. Hager, M. A., Pollak, T., Wing, K., & Rooney, P. M. (2004). Getting what we pay for: Low overhead limits nonprofit effectiveness. Nonprofit Overhead Cost Project, Brief No. 3 from the Center on Nonprofits and Philanthropy at the Urban Institute and the Center of Philanthropy at Indiana University.

  26. Hansmann, H. B. (1980). The role of nonprofit enterprise. The Yale Law Journal, 89(5), 835–901.

    Google Scholar 

  27. Hansmann, H. (1981). Nonprofit enterprise in the performing arts. The Bell Journal of Economics, 12, 341–361.

    Google Scholar 

  28. Hung, C., & Hager, M. A. (2019). The impact of revenue diversification on nonprofit financial health: A meta-analysis. Nonprofit and Voluntary Sector Quarterly, 48(1), 5–27.

    Google Scholar 

  29. Kim, M. (2017). The relationship of nonprofits’ financial health to program outcomes: Empirical evidence from nonprofit arts organizations. Nonprofit and Voluntary Sector Quarterly, 46(3), 525–548.

    Google Scholar 

  30. Kim, M., & Charles, C. (2016). Assessing the strength and weakness of the DataArts cultural data profile in comparison with the NCCS 990 data. Journal of Public Budgeting, Accounting & Financial Management, 28(3), 337–360.

    Google Scholar 

  31. Kim, M., Pandey, S., & Pandey, S. K. (2018). Why do nonprofit performing arts organizations offer free public access? Public Administration Review, 78(1), 139–150.

    Google Scholar 

  32. Kitching, K. (2009). Audit value and charitable organizations. Journal of Accounting and Public Policy, 28(6), 510–524.

    Google Scholar 

  33. Lecy, J. D., & Searing, E. A. (2015). Anatomy of the nonprofit starvation cycle: An analysis of falling overhead ratios in the nonprofit sector. Nonprofit and Voluntary Sector Quarterly, 44(3), 539–563.

    Google Scholar 

  34. Levine Daniel, J., & Kim, M. (2018). The scale of mission-embeddedness as a nonprofit revenue classification tool: Different earned revenue types, different performance effects. Administration & Society, 50(7), 947–972.

    Google Scholar 

  35. Li, W., McDowell, E., & Hu, M. (2012). Effects of financial efficiency and choice to restrict contributions on individual donations. Accounting Horizons, 26(1), 111–123.

    Google Scholar 

  36. Loftin, L. (1998). Protecting the charitable investor: A rationale for donor enforcement of restricted gifts. BU Public Interest Law Journal, 8, 361.

    Google Scholar 

  37. Massing, M. (2019). How the superrich took over the museum world. New York Times.

  38. Mensah, Y. M., & Werner, R. (2003). Cost efficiency and financial flexibility in institutions of higher education. Journal of Accounting and Public Policy, 22, 293–323.

    Google Scholar 

  39. Miller, C. (2005). The looking-glass world of nonprofit money: Managing in for-profits’ shadow universe. The Nonprofit Quarterly, 12(1), 48–55.

    Google Scholar 

  40. Pallotta, D. (2012). Why can’t we sell charity like we sell perfume? Available at: http://www.wsj.com/articles/SB10000872396390444017504577647502309260064.

  41. Parsons, L. M. (2003). Is accounting information from nonprofit organizations useful to donors? A review of charitable giving and value-relevance. Journal of Accounting Literature, 22, 104.

    Google Scholar 

  42. Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence approach. New York: Harper and Row Publishers.

    Google Scholar 

  43. Preacher, K. J., & Hayes, A. F. (2004). SPSS and SAS procedures for estimating indirect effects in simple mediation models. Behavior Research Methods, Instruments, & Computers, 36(4), 717–731.

    Google Scholar 

  44. Shon, J., Hamidullah, M. F., & McDougle, L. M. (2019). Revenue structure and spending behavior in nonprofit organizations. The American Review of Public Administration, 49(6), 662–674.

    Google Scholar 

  45. Surysekar, K., Turner, E., & Wheatley, C. (2015). On the association between donor-imposed financial inflexibility and future donations to charitable organizations. Journal of Management Accounting Research, 27(1), 63–79. https://doi.org/10.2308/jmar-50900.

    Article  Google Scholar 

  46. Temin, P. (1991). An economic history of American art museums. In M. Feldstein (Ed.), The economics of art museums (pp. 179–194). Chicago: University of Chicago Press.

    Google Scholar 

  47. Tian, Y., Hung, C., & Frumkin, P. (2020). Breaking the nonprofit starvation cycle? An experimental test. Journal of Behavioral Public Administration. https://doi.org/10.30636/jbpa.31.93.

    Article  Google Scholar 

  48. Tinkelman, D. (1998). Differences in sensitivity of financial statement users to joint cost allocations: The case of nonprofit organizations. Journal of Accounting, Auditing & Finance, 13(4), 377–393.

    Google Scholar 

  49. Tinkelman, D., & Mankaney, K. (2007). When is administrative efficiency associated with charitable donations? Nonprofit and Voluntary Sector Quarterly, 36(1), 41–64.

    Google Scholar 

  50. Trussel, J. M., & Parsons, L. M. (2007). Financial reporting factors affecting donations to charitable organizations. Advances in Accounting, 23, 263–285.

    Google Scholar 

  51. Tuckman, H. P., & Chang, C. F. (1991). A methodology for measuring the financial vulnerability of charitable nonprofit organizations. Nonprofit and Voluntary Sector Quarterly, 20(4), 445–460.

    Google Scholar 

  52. Urban Institute. (n.d.). Outcome indicators project: A joint project of the Urban Institute and the Center for What Works. Washington, DC.

  53. von Schnurbein, G., & Fritz, T. M. (2017). Benefits and drivers of nonprofit revenue concentration. Nonprofit and Voluntary Sector Quarterly, 46(5), 922–943.

    Google Scholar 

  54. Wing, K., & Hager, M. (2004). Who feels pressure to contain overhead costs? Results from a national survey. Presentation at the annual conference of the Association for Research on Nonprofit Organizations and Voluntary Action, Los Angeles, CA.

  55. Wing, K., Hager, M. Rooney, P., & Pollak. (2005). Paying for not paying for overhead. Foundation News and Commentary, May–June, pp. 32–37.

  56. Yermack, D. (2017). Donor governance and financial management in prominent US art museums. Journal of Cultural Economics, 41(3), 215–235.

    Google Scholar 

Download references

Acknowledgements

The data used for this study was provided by SMU DataArts, an organization created to strengthen arts and culture by documenting and disseminating information on the arts and culture sector. Any interpretation of the data is the view of the author and does not reflect the views of SMU DataArts. For more information on SMU DataArts, visit www.culturaldata.org.

Funding

This study was not funded by any source.

Author information

Affiliations

Authors

Corresponding author

Correspondence to ChiaKo Hung.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Hung, C. Restricted Revenues and Nonprofit Service Delivery: The Roles of Financial Discretion. Voluntas 32, 136–150 (2021). https://doi.org/10.1007/s11266-020-00286-7

Download citation

Keywords

  • Restricted revenues
  • Nonprofit service delivery
  • Financial discretion
  • Revenue concentration
  • Administrative expenses
  • Nonprofit overhead