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Faculty Research Working Paper Series
Elizabeth Keating
Assistant Professor of Public Policy
Assessing Financial Vulnerability in the Nonprofit Sector.
Keating, Elizabeth, Mary Fischer, Teresa Gordon, and Janet Greenlee. "Assessing Financial Vulnerability in the Nonprofit Sector." KSG Faculty Research Working Paper Series RWP05-002, January 2005.
Abstract
Effective nonprofit governance relies upon understanding an organization’s financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang’s or Altman’s in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson’s model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.
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