The effects of funding sources on agency costs in not-for-profit organizations

Abstract

I examine the relation between funding sources and agency costs in not-for-profit organizations (NFPs). Resource dependency theory suggests that NFP governance is determined by the demand for monitoring by fund providers. More restrictive funds are associated with greater monitoring and vice-versa. I predict that NFPs deriving a higher proportion of their revenue from government grants (a more restrictive funding source) will exhibit lower agency costs and NFPs deriving a higher proportion of their revenue from investment income (a less restrictive funding source) will exhibit higher agency costs. I analyze funding compositions of 93,409 NFP-year observations from 1992 to 2006, and find that NFPs that derive a greater proportion of their revenue from government grants pay lower CEO compensation and have higher efficiency ratios. In contrast, NFPs that derive a greater proportion of their revenue from investment income pay higher CEO compensation and have lower efficiency ratios.