View in EDS

Is Financial Leanness Punished by Bond Credit Rating Agencies? The Nonprofit Dilemma of Balancing Trustworthiness and Creditworthiness.

Saved in:
Bibliographic Details
Title: Is Financial Leanness Punished by Bond Credit Rating Agencies? The Nonprofit Dilemma of Balancing Trustworthiness and Creditworthiness.
Authors: Sun, Qingqing1,2 (AUTHOR) qingqing.sun@austin.utexas.edu
Source: Public Budgeting & Finance. Sep2025, Vol. 45 Issue 3, p36-73. 38p.
Subject Terms: *BOND ratings, *NONPROFIT sector, *CAPITAL costs, *COST effectiveness, *BORROWING capacity, *CAPITAL investments, TRUST
Abstract: The number of nonprofits utilizing bond markets to fund capital projects has increased in recent years. This study explores how nonprofit financial conditions impact bond credit ratings, using a novel dataset linking ratings to IRS Form 990 Schedule K data. Ordered probit regressions with Heckman correction reveal that financial leanness—characterized by minimized profits, cash flows, and operating revenue—results in weaker credit ratings. These findings challenge the nonprofit sector's norm of financial leanness, showing it may signal trustworthiness to funders but undermines creditworthiness. Consequently, higher borrowing costs hinder nonprofits' ability to expand programs and scale their mission impact. Summary: This study challenges the nonprofit sector's norm of financial leanness and explains why nonprofits face difficulties securing strong credit ratings. While spending financial surpluses immediately on programs may signal trustworthiness to funders, it negatively impacts creditworthiness and bond ratings.Financial leanness—characterized by minimal profits, cash flow, and operating revenue—results in lower bond ratings, as credit rating agencies view limited reserves as a risk to debt repayment. This increases borrowing costs and restricts nonprofits' ability to expand programs cost‐effectively to meet growing community needs.Reliance on program revenue and high percentages of fixed assets is linked to lower bond ratings, contradicting the belief that these factors reduce default risk.The findings suggest that nonprofits should build moderate reserves, secure favorable bond ratings, and engage funders on the importance of reserves in financing capital projects efficiently. These steps help lower borrowing costs and prevent future reductions in grants and donations. [ABSTRACT FROM AUTHOR]
Copyright of Public Budgeting & Finance is the property of Wiley-Blackwell and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
Database: Business Source Index
Description
Abstract:The number of nonprofits utilizing bond markets to fund capital projects has increased in recent years. This study explores how nonprofit financial conditions impact bond credit ratings, using a novel dataset linking ratings to IRS Form 990 Schedule K data. Ordered probit regressions with Heckman correction reveal that financial leanness—characterized by minimized profits, cash flows, and operating revenue—results in weaker credit ratings. These findings challenge the nonprofit sector's norm of financial leanness, showing it may signal trustworthiness to funders but undermines creditworthiness. Consequently, higher borrowing costs hinder nonprofits' ability to expand programs and scale their mission impact. Summary: This study challenges the nonprofit sector's norm of financial leanness and explains why nonprofits face difficulties securing strong credit ratings. While spending financial surpluses immediately on programs may signal trustworthiness to funders, it negatively impacts creditworthiness and bond ratings.Financial leanness—characterized by minimal profits, cash flow, and operating revenue—results in lower bond ratings, as credit rating agencies view limited reserves as a risk to debt repayment. This increases borrowing costs and restricts nonprofits' ability to expand programs cost‐effectively to meet growing community needs.Reliance on program revenue and high percentages of fixed assets is linked to lower bond ratings, contradicting the belief that these factors reduce default risk.The findings suggest that nonprofits should build moderate reserves, secure favorable bond ratings, and engage funders on the importance of reserves in financing capital projects efficiently. These steps help lower borrowing costs and prevent future reductions in grants and donations. [ABSTRACT FROM AUTHOR]
ISSN:02751100
DOI:10.1111/pbaf.12395