Is Financial Leanness Punished by Bond Credit Rating Agencies? The Nonprofit Dilemma of Balancing Trustworthiness and Creditworthiness

ABSTRACT The number of nonprofits utilizing bond markets to fund capital projects has increased in recent years. This study explores how nonprofit financial conditions impact bond credit ratings, using a novel dataset linking ratings to IRS Form 990 Schedule K data. Ordered probit regressions with Heckman correction reveal that financial leanness—characterized by minimized profits, cash flows, and operating revenue—results in weaker credit ratings. These findings challenge the nonprofit sector's norm of financial leanness, showing it may signal trustworthiness to funders but undermines creditworthiness. Consequently, higher borrowing costs hinder nonprofits' ability to expand programs and scale their mission impact.