ABSTRACT
This empirical research analyzes the capital structure of Canadian charities with panel data over an eight-year period and seeks to contribute to a greater understanding of how nonprofit organizations (NPOs) finance their operations. Specifically, we explore whether Canadian charities finance operations by using net assets, or whether they leverage their assets and pursue financing by issuing debt. Consistent with previous research on the drivers of nonprofit capital structure, our analysis yielded mixed results. Whereas some previous research suggests organizations with larger endowments hold more debt, our findings indicate that the presence of an endowment does not positively influence external financing relative to assets. This interpretation is supported by the finding that highly liquid organizations holding land had significantly lower levels of leverage. It seems likely that organizations are using their cash to finance activities and, possibly, to pay down outstanding debt. Our most notable and consistent finding is the negative relationship between profitability and leverage. Whether or not an organization holds land, higher levels of profitability in these charities were associated with lower levels of debt relative to assets. This result is consistent with pecking order theory and suggests NPOs are turning to internal sources of funding before incurring debt.
