Tax-Exempt Debt and the Capital Structure of Nonprofit Organizations: An Application to Hospitals

Gerard J. Wedig · Michael A. Morrisey

76 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Nonprofit Sector and Volunteering Financial Analysis and Corporate Governance

Abstract

ABSTRACT The availability of tax‐exempt financing provides nonprofit (NP) organizations with their own tax‐based incentives to issue debt. In this article, we develop a theoretical model in which NPs gain an indirect arbitrage from tax‐exempt debt issuance, constrained by: 1) the requirement that fixed investment exceed tax‐exempt debt flows (the project financing constraint), and 2) the constraint against share issuance. These constraints cause them to impute tax benefits to projects that afford access to the tax‐exempt bond market. Empirical tests indicate that NP hospitals behave as if they have target levels of tax‐exempt debt. Debt targeting is constrained by the availability of capital projects, while excess debt capacity stimulates investment.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1984Corporate financing and investment decisions when firms have information that investors do not have 1977Determinants of corporate borrowing 1983Agency Problems and Residual Claims 1991The Theory of Capital Structure 1986The theory and practice of econometrics 1980Optimal capital structure under corporate and personal taxation

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2004Challenges in Managing Nonprofit Organizations: A Research Overview 2010Deal Structuring in Philanthropic Venture Capital Investments: Financing Instrument, Valuation and Covenants 1996Do Nonprofit Hospitals Pay Their Way?2006Financial Indicators for Critical Access Hospitals 2001The Medicare Cost Report and the Limits of Hospital Accountability: Improving Financial Accounting Data 2002Debt, investment and endowment accumulation: the case of not-for-profit hospitals

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