Predicting Organizational Mortality: How Financial Management Matters

• Published date: 01 May 2022
• Date: 01 May 2022
• DOI: 10.1177/00953997211045068
• Subject Matter: Articles

https://doi.org/10.1177/00953997211045068

Administration & Society

2022, Vol. 54(5) 828 –856

© The Author(s) 2021

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DOI: 10.1177/00953997211045068

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Article

Predicting Organizational

Mortality: How Financial

Management Matters

Young Joo Park1, Jongmin Shon2,

and Jiahuan Lu3

Abstract

Managing financial resources is one of the most important responsibilities of

every organization; however, the literature still cannot provide an answer

to an important question: how does financial health matter to organizational

mortality, especially for nonprofit organizations? To advance our knowledge

in this regard, this study empirically examines the effects of solvency,

profitability, margin, and liquidity on nonprofit dissolution. Higher solvency,

profitability, and margin have significant effects on reducing the likelihood

of nonprofit dissolution, but liquidity does not function as a significant

predictor.

Keywords

organizational mortality, nonprofit dissolution, financial health, event history

analysis

Introduction

Managing financial resources is one of the most important responsibilities of

every organization because resource availability determines many of the

1The University of New Mexico, Albuquerque, USA

2Soongsil University, Seoul, Republic of Korea

3Rutgers University – Newark, NJ, USA

Corresponding Author:

Jongmin Shon, Associate Professor, School of Public Administration, Soongsil University, 369

Sangdo-ro, Dongjak-gu, Seoul 06978, Republic of Korea.

Email: jmshon@ssu.ac.kr

1045068AAS0010.1177/00953997211045068Administration & SocietyPark et al.

research-article2021

Park et al. 829

outcomes of organizational operations and behaviors (Kioko et al., 2011). It

has been well documented that financial resources primarily guide organiza-

tional outcomes (Finkler et al., 2018; Mitchell & Calabrese, 2019). For

instance, researchers have shown that procurement of financial resources

affects program performance (Evans et al., 1997; Simon, 1947; Thompson,

2003; Wenglinsky, 1997), managerial efforts toward networking (Faulk et al.,

2016), and nonprofit managers’ decisions on taking reasonable risks and pur-

suing entrepreneurship (LeRoux, 2005). In sum, appropriate management of

financial resources, the lifeblood of organizations, is increasingly seen as a

key to success in public administration and governance (Kioko et al., 2011).

It is difficult to overstate the role that nonprofit financial management

has played in the public administration literature because the nonprofit

sector is an indispensable component of a nation’s democratic governance

system. Indeed, nonprofit organizations not only provide services to meet

diverse needs that cannot be satisfied by government provisions (Weisbrod,

1998) but also collaborate with the government in service delivery

(Milward & Provan, 2000; Salamon, 1995). Moreover, nonprofits engage

with policy makers to advocate for social justice and informed public pol-

icy (Lu, 2018; Mosley, 2012). A viable nonprofit sector thus has strong

implications for public administration and governance. As Smith (2008,

p. 143) argued,

“[G]iven the rise of the advocacy and service role of nonprofits, political and

social citizenship rights now hinge more than ever on the capacity of nonprofits

. . . [and] effective governmental performance . . . now hinges on the health of

nonprofit organizations.”

Over the past several decades, a growing body of literature documents the

dissolution of nonprofit organizations and its causes (Bouchard & Rousselière,

2016; Garrow, 2015; Hager et al., 1996; Harrison & Laincz, 2008). The dis-

solution of nonprofits can not only have direct impacts on their clients

and communities at large but also complicate governments’ service delivery

and policy implementation under a third-party government arrangement

(Salamon, 1995). Understanding nonprofit dissolution thus not only has man-

agerial implications for nonprofits to promote organizational longevity but

also has policy implications for governments to better oversee the nonprofit

sector and maintain its sustainability. Within this body of literature on non-

profit dissolution, the financial antecedents of nonprofit dissolution have not

been well understood (Helmig et al., 2014). In particular, despite the signifi-

cance of financial management to nonprofits, it is still not clear what finan-

cial health indicators can predict the dissolution of an organization.