Charity Navigator Research Articles

Charity Watchdogs and the Limits of Information-Based Regulation

Transparency concerns and the concomitant accountability challenges have motivated policy and legal scholars to explore information-based regulatory approaches. We examine their usefulness in the context of the nonprofit sector which tends to show signs of governance failure. Although nonprofits are required by law to disclose information on fund use, nonprofit donors face difficulties in accessing and interpreting information about how nonprofits are deploying resources. Charity watchdogs make this information available to donors in a convenient format. In theory, this should allow donors to reward nonprofits that devote resources to service delivery and to punish those that are less careful about controlling overheads. To test the relationship between charity ratings and donations, we examine 90 nonprofits in the state of Washington for the period 2004–2007. Drawing on ratings data provided by Charity Navigator, we find that changes in charity ratings tend not to affect donor support to these nonprofits. We explore this statistical finding via interviews with 10 charities located in Washington State. Supporting the statistical results, we find that charities believe that donors tend not to systematically embed ratings in their donation decisions. Instead, they believe that donors assess nonprofits’ effectiveness and trustworthiness via other means such as familiarity, word-of-mouth, or the visibility of the nonprofit in their community. In sum, the policy challenge is to provide information which users desire such as organizational effectiveness as opposed to basic fund allocation in the case of non-profits. What matters for policy efficacy is not how much information is provided but of what type.

Table of Contents

Abstract Nonprofit Finance Fund's ‘tool kit’ provides certainty in uncertain times Foundations acted quickly during recession Conferences/Events Technology Blackbaud's Altru centralizes data for arts and cultural organizations Giving Corporate philanthropy adapts to meet challenges, old and new DVG members' philanthropic efforts continue despite tough times Resources Tax Issues IRS notice helps small businesses, tax‐exempts navigate health care tax credit Donors Nationwide, contributors happy with nonprofits, but still plan to reduce giving Fundraising Charity Navigator examines best and worst metro markets for fundraising Employment Law Quick Looks

The role of rating agencies in the market for charitable contributions: An empirical test

Rating agencies play the role of information intermediaries in the market for donations. These watchdog organizations obtain and interpret accounting data and other information about charitable organizations and report ratings to help donors select among the many organizations soliciting contributions. In the age of the internet, information from Internal Revenue Service Form 990 returns prepared by tax-exempt organizations is more readily accessible than ever before. This study examines whether the zero- to four-star ratings provided by Charity Navigator have additional information content for donors. Charity Navigator was selected because its rating system relies almost exclusively on the 990 returns and presumably adds value by incorporating peer-group expectations for various ratios and by presenting straightforward and concise data. Using a random sample of 405 charities rated by Charity Navigator, our results suggest that rating changes do impact contributions. Positive rating changes were associated with an increase in contributions and organizations with a decline in rating were associated with decreased contributions. These effects were in addition to what would be predicted using an efficiency ratio commonly computed from Form 990 accounting data and other control variables.