Investment Decisions of Nonprofit Firms: Evidence from Hospitals

Abstract

More than 20% of U.S. firms are nonprofit, yet this organizational form has received little attention in corporate finance. This paper takes a step towards closing this gap by examining investment choices of nonprofit hospitals. Most hospitals hold large financial assets, and hospital-specific shocks to the performance of these assets are likely unrelated to investment opportunities. We use this setting to test how shocks to cash flows affect hospital investment. We find that capital expenditures increase, on average, by 10-28 cents for every dollar received from financial assets. The sensitivity is similar to that found earlier for shareholder owned corporations, and it is driven by spending on buildings and medical equipment. We do not find that hospital executives are significantly "paid for luck", or that spending on salaries of other personnel and perks responds significantly to cash flow shocks. Hospitals with an apparent tendency to overspend on medical procedures do not exhibit higher investment-cash flow sensitivities than otherwise comparable hospitals. However, the sensitivities are higher for hospitals that appear financially constrained.

Keywords: Investment, Cash Flows, Nonprofits, Hospitals

JEL Classification: G31, G32, L31