Disclosing to Defend Public Charity Status: A Study of Reporting Quality and Future Donations

Abstract

This study investigates the relation between a public charity’s disclosure quality and future donations when the entity is at risk of losing its public charity status. Publicly supported charities are required to derive at least one-third of their financial support from public sources. If public support is below one-third but above ten percent, charities can attempt to preserve public charity status by meeting a “facts-and-circumstances test” which requires the charity to explain factors that support its continued existence as a public charity. Using textual analysis, I evaluate disclosure characteristics and find that charities providing a more relevant and specific facts-and-circumstances narrative are more likely to meet the one-third public support threshold the following year. The results highlight the importance of disclosure requirements as a mechanism to both inform regulators of charitable performance and motivate charities to fulfill their exempt purpose.