The Relation Between Cash Reserves, Governance, and Donations in Nonprofit Organizations

Abstract

Cash reserves enable nonprofit organizations to absorb financial shocks and meet unexpected demand for charitable services. Large cash holdings, however, provide managers with an opportunity to use funds to accrue private benefits, and excessive cash levels may negatively influence donors’ contribution decisions. Although an extensive literature examines cash holdings in for-profit firms, few accounting studies address the determinants and consequences of cash reserves in nonprofits (Core et al., 2006). This study investigates whether corporate governance mechanisms, which are designed to limit managers’ opportunistic behavior, are associated with nonprofit managers’ ability to build cash reserves. It also examines how excessive cash reserves influence donors’ decisions to contribute to a charity. Results indicate that cash reserves are positively associated with three proxies for corporate governance (board size, board independence, and board monitoring activities). We also find that excessive cash holdings are negatively associated with future donations, after controlling for governance. Our results suggest that donors withhold contributions from charities that are likely to hold their donations for future use rather than deploy them in the current period. This study contributes to research addressing the role of governance in controlling nonprofit managers’ actions and provides new evidence on factors affecting donors’ giving decisions.