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Financial reporting quality and price competition among nonprofit firms

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Donors increasingly rely on financial information reported by Internal Revenue Service (IRS) Form 990 to allocate donations among nonprofit firms. However, competition among nonprofits creates an incentive for managers to under-report management and fund-raising expenditures to make their firms appear relatively efficient. Increasingly, researchers suspect that information provided in the Form 990 may not accurately portray the true financial condition of nonprofit firms. Inaccurate price information weakens the ability of donors to promote efficiency and discipline excess among nonprofit managers. This article examines the reaction of donors to variation in Form 990 reporting quality. We find that donors reward nonprofit firms for investments in more accurate financial reporting. Additionally, higher quality financial information sharpens the ability of donor markets to discipline nonprofit firms by increasing price sensitivity. The primary implication of this study is that regulatory improvements in reporting quality could increase the ability of donor markets to serve as a viable governance mechanism for improving nonprofit efficiency.
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Document Type: Research Article

Affiliations: 1: Department of Economics, Samford University, Birmingham, USA 2: Department of Accounting, Samford University, Birmingham, USA

Publication date: 2010-08-01

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