Nonprofit accounting conservatism

Abstract

In this study we examine whether U.S. nonprofit organizations engage in conservative financial reporting, and whether conservatism has an impact on future donations. Employing the model developed by Ball and Shivakumar (2005) for non-public companies, coupled with a sample of over 72,000 industry diverse nonprofit-years, we find evidence consistent with nonprofit firms, on average, reporting conservatively. Further, when we consider stakeholder demand for financial reports, we find that organizations that receive sizable government funding report more aggressively, consistent with a reduced demand for financial statement information. We also consider whether nonprofit managers have incentives to report conservatively, and document that organizations providing bonuses or perquisites to their executives report more aggressively. Finally, we study whether donors value conservative reporting and find that organizations that report conservatively are associated with higher future contributions. We believe these findings will be of great interest to managers, regulators, and those that engage in academic research in this important sector of our economy.