Are Restricted Funds an Effective Governance Tool for Non-Profit Organizations?

Abstract

This paper studies the use of restricted funds as a monitoring tool for non-profit organizations. The paper examines a random sample of 600 non-profit organizations for evidence that restricted funds are a substitute for other forms of governance and that the use of restricted funds affects organizational behavior. The results provide evidence that restricted funds are used and are useful as a form of governance. Specifically, restricted funds and tax exempt debts may act as substitute governance tools; the likelihood of reporting fundraising expenses is positively related to having restricted funds; and compensation for officers and directors is inversely related to the level of permanently restricted funds.