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Does transparency come at the cost of charitable services? Evidence from investigating British charities

Canh Thien Dang and Trudy Owens ()

Journal of Economic Behavior & Organization, 2020, vol. 172, issue C, 314-343

Abstract: Recent high-profile scandals related to misuse of funding and donations have raised the demand for scrutiny over financial transparency and operational activities of non-profit organizations in developed countries. Our analysis challenges the common practice in the sector of using programme ratios and overhead costs as indicators for non-profit accountability. Using Benford's Law to measure irregularities in financial data for a large sample of public charities we estimate that 25% of the sample potentially misreport their financial information. We show theoretically and empirically that charities with a higher programme ratio (their level of spending on charitable activities), will be less likely to misreport their financial information only when their overhead costs (spending on governing activities) are also sufficiently high. Tighter monitoring becomes ineffective in increasing the sectoral transparency and accountability unless accompanied by a sufficiently high level of charitable spending.

Keywords: Non-profits; Misinformation; Public provision of financial reports; Benford's law; Heteroskedasticity-based instruments (search for similar items in EconPapers)
JEL-codes: L31 D82 H83 H49 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:172:y:2020:i:c:p:314-343

DOI: 10.1016/j.jebo.2020.02.020

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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