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Valuing the Right to Sue: An Empirical Examination of Nonprofit Agency Costs

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Abstract

Do stakeholders’ suits against managers reduce agency costs? I examine this question using a large panel of private-foundation tax returns and hand-collected data on state-law variations in the right of donors to sue wayward managers of nonprofits. In both difference-in-differences and triple-difference estimations, I find on average that standing to sue substantially increases donations and reduces the share of firms’ expenses devoted to administrative costs among private foundations. These outcomes are robust to other estimating strategies, such as propensity-score matching and regression adjustment with inverse probability weights. Coefficients are smaller and less precise among large operating charities. I argue that my results weigh in favor of expanded donor standing to sue, at least for foundations. My findings also suggest that the agency costs of philanthropic organizations are substantial, which has implications for, among other policy debates, tax policies that encourage perpetual lived philanthropy.

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