Spreading the News: Donor Response to Disclosures About Nonprofit Fraud

Abstract

Even the most conscientious nonprofit organizations can fall victim to fraud. We examine how a nonprofit organization’s Form 990 disclosures and media coverage about an asset diversion influence subsequent donor support. Consistent with a loss in trust, we observe a decrease in donations following a diversion. This decrease is amplified when the diversion is reported in the news. We also find that donations decline more when organizations do not provide transparent disclosures and when losses are higher but only if the diversion receives media coverage. Finally, our results indicate that donors punish organizations less when they report higher recoveries and governance improvements. This study describes mechanisms though which news coverage enhances donor oversight. The media can: (a) directly inform some donors, (b) prompt some donors to obtain further information, and (c) motivate organizations to provide higher-quality disclosure.