Nonprofit equity: a behavioral model and its policy implications

This article assumes that nonprofit decisionmakers have an incentive to earn and accumulate surpluses, and it suggests six reasons for this being the case. Based on the assumption that both the program outputs and the equity of a nonprofit yield satisfaction to its decisionmakers, a behavioral model is developed. This is used to derive a demand function for equity, which is then applied to a national sample of 6168 charitable nonprofits drawn by the Internal Revenue Service for the 1985 taxable year. The results substantiate the hypothesis that nonprofit decisionmakers consciously plan to increase their organization's equity. Currently, evidence of continued equity buildup is not sufficient to call into question a nonprofit's exempt status, because federal tax laws assume that surplus accumulations will ultimately be used in support of program mission. However, equity accumulation can become excessive. We present several criteria to define excessive equity accumulation and discuss why large equity accumulations may not be in the best interest of society.