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The Role of Rating Agencies in the Market for Charitable Contributions: An Empirical Test
Teresa P Gordon, University of Idaho
Cathryn L Knock, University of Idaho
Daniel G Neely, University of Wisconsin - Milwaukee
ABSTRACT: Rating agencies presumably play the role of information intermediaries in the market for donations. These watchdog organizations obtain and interpret information about charitable organizations and report ratings to help donors select among the many organizations soliciting contributions. In the age of the internet, basic information about tax-exempt organizations is more readily available than ever before. This study examines whether the zero- to four-star ratings provided by Charity Navigator have additional information content for donors. Using a random sample of 411 charities rated by Charity Navigator, our results suggest that rating changes do impact contributions. Positive rating changes were positively associated with an increase in contributions and organizations with a decline in rating were associated with decreased contributions. These effects were in addition to what would be predicted using a simple efficiency ratio commonly computed from Form 990 accounting data.
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