Pressure, Cost Accounting, and Resource Allocations: Experimental Evidence on Nonprofit Financial Decision-Making

Abstract

Nonprofit organizations are under pressure to contain their overhead costs. This pressure can affect spending behavior and create an impulse to manipulate financial reporting data. Drawing on stakeholder theory, this study develops a comprehensive framework of ratio management pressure and examines the extent to which external and internal pressures affect financial decisions. We conduct a scenario experiment wherein financial managers perform accounting and spending tasks after subjection to various types of pressure: donor pressure, board pressure, or media pressure. We find that donor pressure significantly affects both accounting and spending behavior, whereas board and media pressure affect only accounting choices. Our research generates insights into the extent to which the observed practice of continuous cost containment is driven by external pressure or rather by organizations themselves. These findings are insightful for nonprofit leaders who wrestle with complex financial challenges and the expectations of multiple stakeholder groups.