Funding Implications of Normal and Excessive Profitability in the Nonprofit Sector

We study how nonprofit profitability affects external funding. Using a sample of over 273 thousand U.S. nonprofit organization (NPO) observations between 1999-2019, we find that profitability is associated with greater public support; however, when NPOs are excessively profitable, they receive fewer subsequent donations. We find a similar relationship, but to a smaller degree, between NPO profitability and government grant funding. We infer that funders desire moderate but not overly high profitability. We also find that donors are more tolerant of normal and excessive profitability for NPOs in the healthcare industry, smaller NPOs, and NPOs with shorter planning horizons. The relationship between profitability and external funding is weaker during recession periods, with funders not penalizing excessively profitable organizations during economic downturns