Abstract We find evidence indicating that donors use third‐party rating information when they donate to U.S. nonprofit organizations (nonprofits). Specifically, using a sample of over 3,800 unique nonprofits rated by the three largest charity rating organizations in 2007, and over 12,000 unrated control nonprofits, we find that rated nonprofits have significantly higher direct donations than unrated charities. We also hypothesize and find that nonprofits with ratings from multiple rating organizations receive incrementally higher levels of donations. In addition, although charities that receive a positive rating have higher levels of donor support than those receiving a negative rating, both positively and negatively rated nonprofits receive a higher level of direct donations than unrated nonprofits. Finally, we find that nonprofits with consistently good ratings receive higher donations than those with mixed or consistently negative ratings, indicating the donor community values consistency across the three rating agencies.

ABSTRACT In this paper we show that supporters reduce donations to nonprofits subsequent to disclosure of high executive compensation. We find evidence consistent with large, sophisticated donors actively seeking out and reacting to compensation information made available in IRS Form 990, while smaller donors react to compensation disclosures in the media. Additional analysis indicates that these results vary systematically across nonprofits, as we find a stronger negative relation in nonprofits classified as more charitable, and a weaker relation in nonprofits that provide services to their donors. In contrast neither grantors nor patrons appear to react to executive compensation disclosures. Data Availability: All data are available from public sources.

Abstract In 2008, the IRS added several schedules to Form 990, including Schedule R, related party transactions. Utilizing Schedule R, we investigate and descriptively document the existence of related parties and the types of transactions engaged in with those related parties. Then, to provide evidence of the usefulness of these disclosures, we tie into the literature on financial reporting quality. Prior research into financial reporting quality shows that donors discount program ratios when a nonprofit organization reports zero fundraising expenses, implying that they find reporting zero fundraising expenses to be a proxy for poor financial reporting quality. A plausible reason for organizations reporting zero fundraising expenses is that a related party conducts fundraising on the organization's behalf. Consistent with this interpretation, we find that when nonprofits disclose that fundraising services are provided by a related entity, they are more likely to report zero fundraising expenses. We also find that disclosure of related party fundraising mitigates donor discounting of the program ratio when zero fundraising expenses are reported. However, we only find that this mitigation occurs in nonprofits with sophisticated donors. In sum, we find evidence consistent with donors—in particular, sophisticated donors—using disclosures provided in Form 990 to supplement the amounts recognized. Our findings demonstrate the importance of, and are consistent with the use of, these related party disclosures. On a broader level, these findings provide insight into how thoroughly donors are willing to review Form 990 to get information relevant to their donation decision.

ABSTRACT We examine whether donors reward nonprofit organizations that report better governance. From a sample of 10,846 organizations from 2008 to 2010, we first identify seven nonprofit governance dimensions using factor analysis. We then test whether the quality of governance influences donor decisions by including the seven governance factors in the standard donor's demand model. We find consistent evidence that donations and government grants are positively associated with six of the seven factors that capture good governance, including formal written policies (e.g., conflict of interest), independent audits and audit committees, review and approval of executive compensation, board oversight (e.g., board independence), management characteristics (e.g., no related parties), and accessible financial information. Our results have implications for nonprofit managers and regulators. Moreover, mandatory disclosure of governance policies for nonprofit organizations provides an interesting contrast to mandatory adoption of governance policies for publicly traded companies. JEL Classifications: G18; G38; H39; L30; L31; L38; M40; M41; M42; M48. Data Availability: All data are publicly available.

ABSTRACT We examine the impact of Internal Revenue Service (IRS) Code Section 4960 of the Tax Cuts and Jobs Act of 2017 on nonprofit organizations (NPOs). This section imposes a 21% excise tax on nonprofit employee compensation exceeding $1 million per covered individual. As this is an exogenous shock imposing a cost on NPOs with highly paid employees, it leads us to examine whether those employees share the newly added cost via a reduction in their compensation. Using a difference‐in‐differences analysis on data from IRS Form 990 filings for nearly 40,000 nonprofit employee‐year observations from 2015 to 2010, we find that the level of compensation, on average, increases for treated executives in the post–Section 4960 period, but at a slower rate than that of the control group of executives. These results are consistent with highly paid employees being reluctant, on average, to take a pay cut, but being more willing to accept a reduction in their rate of pay growth. Our results are robust to alternative treatment specifications and control samples, such as employees who earn more than $1 million but are not covered under Section 4960 and medical professionals who are specifically exempt from Section 4960. We also find that compensation decreases are more likely for treated employees post–Section 4960 and that replacements for treated CEOs take an even steeper pay cut post–Section 4960. Additionally, we observe increased turnover for treated CEOs post–Section 4960, consistent with Section 4960 leading to conflicts between treated CEOs and their boards regarding the excise tax and who should bear its cost.