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Nonprofit expense management and the zero-profit threshold

Nonprofit expense management and the zero-profit threshold 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/approachThe paper empirically examines nonprofits’ propensity to cut expenses relative to the attainability of the zero-profit threshold.FindingsThis 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/implicationsThis 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 implicationsAdditionally, the results suggest that even the lack of explicit profit motive may not quell earnings management behavior.Originality/valueThese 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Nonprofit expense management and the zero-profit threshold

Pacific Accounting Review , Volume 33 (4): 20 – Aug 17, 2021

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0114-0582
DOI
10.1108/par-04-2020-0043
Publisher site
See Article on Publisher Site

Abstract

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/approachThe paper empirically examines nonprofits’ propensity to cut expenses relative to the attainability of the zero-profit threshold.FindingsThis 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/implicationsThis 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 implicationsAdditionally, the results suggest that even the lack of explicit profit motive may not quell earnings management behavior.Originality/valueThese 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.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Aug 17, 2021

Keywords: Nonprofits; Expense management; Earnings targets; Earnings management; Not-for-profit; M41; L31

References