Capital Structure of Nongovernmental Development Organizations

• Author: Inigo Garcia‐Rodriguez,Marc Jegers
• DOI: http://doi.org/10.1002/nml.21275
• Published date: 01 December 2017
• Date: 01 December 2017

175

N M  L, vol. 28, no. 2, Winter 2017 © 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21275

Journal sponsored by the Jack, Joseph and Morton Mandel School of Applied Social Sciences, Case Western Reserve University.

Capital Structure of Nongovernmental

Development Organizations

FIRST CROSS-COUNTRY EVIDENCE

Inigo Garcia-Rodriguez ,1 Marc Jegers 2

1 Autonoma University of Madrid , 2 Vrije Universiteit Brussel

In the first international study of this kind, we analyze the capital structure of 364

nongovernmental development organizations ( NGDOs ) from three different countries:

Belgium, Spain, and the United Kingdom. We observe lower debt ratio values in the

United Kingdom, and significant differences between countries were found by testing an

econometric model with the five classical determinants of leverage, considering total debt

and both long- and short-term debt. We find support for the pecking order theory, and we

broadly discuss some possible reasons for the obtained differences.

Keywords: capital structure , nonprofit organizations , international studies , NGDOs ,

Europe

CAPITAL STRUCTURE REFLECTS THE MAIN fi nancing decision of organizations: choos-

ing between equity and debt. In the nonprofi t sector, research has mainly followed previous

research from the for-profi t sector, starting some decades later than in the corporate fi eld.

Some limitations must be dealt with, such as the absence of international databases and, in

general, the problematic access to the necessary information.

This study focuses on a particular subsector of the nonprofit field, analyzing nongovern-

mental development organizations (NGDOs). In Europe, these are the organizations that

work in the nonprofit subsector of the international cooperation and development, trying to

improve the living conditions of developing countries. NGDOs receive a portion of the Offi-

cial Development Assistance (ODA) from national governments, as well as significant dona-

tions from individuals. However, the recent economic and financial crisis had a huge impact

on these nonprofit organizations (NPOs): some countries reduced their ODA; household

income problems threatened private donations; and credit restrictions limited the available

financing alternatives of organizations. All these problems have meant a critical financial sce-

nario for these NPOs, so their leverage decisions become more relevant and their study more

important. Furthermore, the literature on financial vulnerability of NPOs has emphasized

the importance of the ratio of debt to total assets, as the more in debt, the more vulnerable

(Andres-Alonso, Garcia-Rodriguez, and Romero-Merino 2016 ; Trussel 2002 ). In fact, higher

debt ratio values had a negative impact during the financial crisis (Lin and Wang 2016 ).

Correspondence to: Inigo Garcia-Rodriguez, Autonoma University of Madrid, Department of Finance

and Commercial Research, c/ Francisco Tomas y Valiente, 5. Campus de Cantoblanco, 28049 Madrid, Spain.

Email: inigo.garcia@uam.es.

Research Article

Nonprofi t Management & Leadership DOI: 10.1002/nml

176 GARCIARODRIGUEZ, JEGERS

Previous studies began by testing the most important theories in the for-profit sector (trade-

off and pecking order), and, afterward, they incorporated the agency theory, the effect of

some characteristics of NPOs (endowment), and the impact of the revenue structure. Prior

research has always analyzed entities from only one country, which prevents the introduction

of the organizations’ nationality as a source of the differences between the financial decisions

of NPOs. Thus, the main aim in this article is to analyze the existence of differences in the

NPOs’ capital structure related to the country in which they are based. This topic is especially

useful for practitioners, who, despite the globalization process, could appreciate significant

differences across countries in debt levels of NPOs that work in the same subsector. Particu-

larly, some international NGDOs are set up in several developed countries at the same time,

so it is quite intriguing to understand why they do not have the same financial behavior. It

is also interesting for society, which could ask itself why NPOs that receive both donations

and public funding have taken different financial decisions depending on the organization ’ s

nationality. In fact, as Calabrese and Grizzle ( 2012 ) indicate, donors contemplate organiza-

tions’ leverage decisions when choosing the NPO to which they donate. Finally, this topic is

also interesting for academics, as it constitutes a novel line of research that could be developed

in future studies.

This is the first international study on this topic in the nonprofit sector, but, as in the pioneer

papers of companies’ capital structure, the number of countries and variables is quite limited.

In this research, we analyze NPOs from three different European countries: Belgium, Spain

and the United Kingdom. We obtain significant differences between the NPOs’ capital struc-

ture, both in the descriptive and in the explanatory results, depending on the home country.

Such results emphasize the importance of considering the NPOs’ nationality and the difficulty

of generalizing the results when only one country is studied. In addition, our results support

the pecking order theory when we analyze total and long- and short-term debt in the full sam-

ple, although this finding is not obtained in each of the three countries consistently. Therefore,

this study is only a first step in this area, testing the existence of differences in the capital struc-

ture of the NPOs depending on their home country. Further research should continue this

line of study, analyzing whether such differences involve a distinct organizational behavior.

The rest of the article is organized as follows: We begin with a review of the literature of the

NPOs’ capital structure. In the next section, we explain our sample, methodology, and vari-

ables. Then, we show the results and discuss them extensively. Finally, we present the main

conclusions, limitations, and future research on this topic.

Capital Structure and NPOs

Capital structure has seldom been studied in the nonprofit sector (Denison 2009 ; Jegers and

Verschueren 2006 ), in contrast with the abundant literature found involving the for-profit

sector. Furthermore, the research in the nonprofit sector began more than thirty years later

than the seminal study of companies’ capital structure (Modigliani and Miller 1958 ). In recent

years, the number of studies has increased, attempting to build a comprehensive theory that

includes some distinctive features of NPOs.

Theories and Determinants of NPOs ’ Capital Structure

Following for-profit studies, trade-off and pecking order theories are the two most empirically

contrasted theories. These traditional theories explain the organizations’ capital structure in