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  • Writer's picturecleopatracharles

Which Arts Nonprofits Issue Debt?

Nonprofits looking to finance capital projects have four options: they can use previously accumulated net assets, start a capital campaign, issue debt, or use a combination of debt and wealth. The results from our 2021 study provide broad support for the results observed in earlier studies on the topic within the nonprofit sector as a whole. We find that there is a positive correlation between debt and asset tangibility and a negative correlation between debt and profitability. Surprisingly, we find a negative association between debt use and endowment which suggests that having an endowment reduces the need for debt because the endowment can generate resources that can be used as internal financing sources. Additionally, our results also show that earned revenue is positively correlated with financial debt. Earned revenue is less risky and less volatile than other sources of revenue and is likely viewed favorably by banks and other lending institutions. Earned revenue is suitable for collateral and nonprofits that are more commercial, such as some arts organizations, might be more inclined to borrow. Our study finds support for both pecking order theory and the static trade-off theory, indicating that there is no one dominant capital structure theory to explain capital structure when it comes to arts nonprofit organizations.

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