Nonprofit expense management and the zero-profit threshold
ISSN: 0114-0582
Article publication date: 16 July 2021
Issue publication date: 17 August 2021
Abstract
Purpose
In a wide variety of settings, individuals target round-numbered thresholds, relaxing effort when they are out of reach. This paper aims to investigate whether this phenomenon occurs in nonprofits as well.
Design/methodology/approach
The paper empirically examines nonprofits’ propensity to cut expenses relative to the attainability of the zero-profit threshold.
Findings
This paper finds nonprofit firms are more likely to cut expenses when faced with small expected losses than with larger losses, and this pattern varies predictably with incentives to reach the zero-profit threshold.
Research limitations/implications
This suggests managers are motivated by desire to reach the zero-profit threshold rather than to improve firms’ economic situations, as the propensity to cut expenses is lower when the threshold is out of reach.
Social implications
Additionally, the results suggest that even the lack of explicit profit motive may not quell earnings management behavior.
Originality/value
These results begin to close the gap in our understanding of expense management in nonprofit firms, showing how operating expenses can be used to manage earnings.
Keywords
Acknowledgements
This paper is based, in part, on the author’s dissertation completed at Yale University. She gratefully acknowledges the support of her dissertation committee, Jake Thomas (Chair), Frank Zhang, Alina Lerman, and Thomas Steffen. She also thanks Rick Antle, Stan Gartska, Frank Murphy, Toomas Laarits, Avner Langut, Erik Olson, Robert Stoumbos, and Stan Veliotis for their comments and suggestions. The author appreciates feedback from two anonymous referees as well as workshop participants at the 2017 AAA Government & Nonprofit Section Midyear Meeting, the University of Connecticut, Baruch College, the University of Arizona, Pace University, Yeshiva University, Rutgers University – Camden, George Mason University, and Fairfield University.
Citation
Miller, S.M. (2021), "Nonprofit expense management and the zero-profit threshold", Pacific Accounting Review, Vol. 33 No. 4, pp. 397-416. https://doi.org/10.1108/PAR-04-2020-0043
Publisher
:Emerald Publishing Limited
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