Testing Competing Capital Structure Theories of Nonprofit Organizations

The static trade-off and pecking order capital structure theories are analyzed and applied to nonprofit organizations. In addition, this paper also considers how nonprofits adjust their leverage over time. The analyses consider the unique role of donor-restricted endowments in the decision to borrow, as well as different types of borrowing by nonprofits. The results indicate that nonprofit capital structure choices are best explained using the pecking order theory, in which internal funds are preferred over external borrowing. Further, nonprofit endowment is not found to increase leverage. Despite the unambiguous findings across varying definitions of leverage, the results also suggest that a “modified pecking order” is a more apt descriptor of nonprofit behavior.