Working Paper: NBER ID: w21066
Authors: David Yermack
Abstract: I study “donor governance,” which occurs when contributors to non-profit firms place restrictions on their gifts to limit the discretion of managers. In a study of U.S. art museums, I find that this practice has grown significantly in recent years, and it represents the largest source of permanent capital in the industry. When donor restrictions are strong, museums shift their cost structures away from administration and toward program services, and they exhibit very high savings rates, retaining in their endowments 45 cents of each incremental dollar donated. Retention rates are near zero for cash generated from other activities. Restricted donations appear to stabilize non-profits and significantly influence their activities, but they reduce management flexibility and may contribute to lower profit margins. Rising donor governance in U.S. art museums may represent a reaction by contributors to the industry’s high rates of financial distress, weak boards of trustees, and large private benefits of control enjoyed by managers.
Keywords: donor governance; financial management; art museums; restricted donations
JEL Codes: G32; G34; L31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| restricted donations (D64) | cost structures (L11) |
| restricted donations (D64) | spending on programming (H56) |
| restricted donations (D64) | administrative costs (M41) |
| restricted donations (D64) | operating margins (L21) |
| restricted donations (D64) | financial performance stability (G32) |
| restricted donations (D64) | operating flexibility (D25) |
| restricted donations (D64) | profit margins (L21) |
| restricted donations (D64) | savings rate (D14) |
| restricted donations (D64) | lower operating performance (L21) |