The relation between debt financing and not-for-profit hospitals` donations

Abstract

Debt financing has been discussed extensively in corporate finance; however, previous studies seldom apply it to not-for-profit hospitals. Magnus et al. (2003) and Yetman (2007) argued that debt financing would have a negative impact on the charitable donations of notforprofit hospitals, but they did not provide empirical evidence. This study is the first paper to investigate the relationship between debt financing and donation revenue by using 38 notforprofit hospitals from 2000 to 2006 in Taiwan. According to our empirical results, we have proved that debt financing has both a crowd-in effect and crowd-out effect on not-forprofit hospitals` donations. The crowd-in effect tends to exist in low debt ratio hospitals, while the crowd-out effect is often found to exist in not-for-profit hospitals with higher debt ratios. We therefore conclude that Magnus et al. (2003) and Yetman (2007) only proposed the crowd-out effect of debt financing for not-for-profit hospitals; however, they did not consider the possible crowd-in effect of debt financing as we have demonstrated in this study.