Topic: Financing Nonprofits

Speaker: Stefan Zeume, Assistant Professor of Finance, University of Illinois at Urbana Champaign, Gies College of Business

Time: 10:00am-11:30am, Wednesday, May 27

Location: 4-101

Abstract:

Nonprofits finance more than $3 trillion in annual program spending but operate without access to equity or deep debt markets. This paper develops and tests a dynamic theory of nonprofit finance in which liquidity, fundraising, and governance jointly substitute for capital market instruments. Managers allocate resources to maximize the present value of mission services, choosing spending, fundraising effort, and borrowing while donors adjust giving based on observed reserves and oversight. When cash balances are high, donors restrict or redirect future gifts; when balances are low, they increase unrestricted support. Fundraising endogenously generates liquidity after shocks, but its effectiveness depends on governance and reputation. Using panel data on over 460,000 U.S. nonprofits (2010–2023), the evidence supports the model’s predictions and reveals a “cash-rich paradox”: organizations with large reserves attract less donor relief and retrench more after funding shocks, whereas strong governance compels the deployment of restricted reserves to sustain mission spending.