Cash Management by Nonprofit Organizations: Theory and Evidence

Abstract

This research studies cash management of nonprofit organizations. In addition to the conventional money demand models (including the transactions approach, the inventory approach and the value-of-time approach), my main focus is on developing and estimating a generalized differential cash constraint model. Nonprofit organizations bear special social responsibilities and missions. They engage in some specific activities to fulfill the objectives of social value creation. The existing literature pays more attention to the behaviors of private profit-seeking firms and governmental organizations, leaving the economic behavior of nonprofit organizations largely unexplained. Cash management is an important issue for the nonprofit organizations in maintaining the smoothness of its operation and achieving its ultimate objectives. The empirical implementation of this research is based on three original panel data sets of 26 Taiwanese nonprofit proprietary hospitals, 32 Taiwanese governmental hospitals and 26 Taiwanese private universities. An interesting fording is that different cash constraint phenomenon exists in the nonprofit organizations significantly. While a scale effect of cash management is present in religious hospitals and governmental hospitals, it is absent in private universities. The nonprofit organizations that devote more resources to public interest services like religious hospitals and governmental hospitals hold less cash in response to expenditures than those of relatively low public interest services devoted group. Holding expenditures constant, religious hospitals, governmental hospitals and universities with greater scholarship per student hold more cash than other type of nonprofit organizations.