Abstract
This study examines a group of nonprofits rated four stars by Charity Navigator. The purpose is to determine whether this select group of charities exhibits characteristics associated with top charitable organizations, or whether the four-star rating achieved is limited to the more narrow financial metrics employed in the methodology utilized by Charity Navigator. This study finds that organizations rated four stars by Charity Navigator show a lower level of excess cash holdings, report a lower level of compensation expenses and exhibit lower sensitivity of compensation to performance. Financially, these organizations are less vulnerable than their lower rated peers. The results from this study shed light on the continuing debate of the effectiveness of rating agencies to accurately identify top performing charitable organizations.
Highlights
The current economic period in the United States has been dubbed the “Great Recession,” and for good reason
The purpose of this study is to examine a group of nonprofit organizations rated four stars by Charity Navigator, to determine whether this select group of charities exhibits characteristics associated with top charitable organizations, or whether the four-star rating achieved is limited to the more narrow financial metrics employed in the methodology utilized by Charity Navigator
The findings suggest that organizations rated four stars by Charity Navigator report a lower level of excess cash holdings and executive compensation than their lower rated peers
Summary
The current economic period in the United States has been dubbed the “Great Recession,” and for good reason. Prior research has found that donors respond to assessment of the Better Business Bureau Wise Giving Alliance (Chen 2009; Sloan 2008) and star ratings of Charity Navigator (Gordon et al 2009). The section introduces Charity Navigator and discusses studies that have examined the characteristics of rated organizations. They have filed Form 990s with the Internal Revenue Service (IRS) for at least four years and they are based in the United States These organizations do not need to have any relation with Charity Navigator. Charity Navigator assigns points to each organization it rates in seven categories. A follow up study by Grant (2010) supports the notion that donors respond to the Charity Navigator ratings. A follow up study by Grant (2010) supports the notion that donors respond to the Charity Navigator ratings. (Note 3) The significance of the four-star rating motivates the significance of studying the underlying characteristics of these organizations
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