Why Does Excess Cash Crowd Out Donations? The Role of Overhead Ratio and Fundraising Efforts

Abstract This study explores how excess cash holdings are associated with the level of donations nonprofit organizations (NPOs) receive, emphasizing the mediating roles of overhead ratio and fundraising efforts. Drawing on interdependent utility theory, agency theory, the precautionary motive of cash and resource dependence theory, we develop a theoretical framework to explain donor behaviour in response to NPO financial management. Using an unbalanced sample of 5982 British charities for the period 2015–2022 (25,641 year‐observations), we apply structural equation modelling (SEM) with clustered robust standard errors to address panel specificities. Our results suggest a mediating effect of overhead ratio and fundraising efforts on the relationship between excess cash holdings and donations. While donors do not seem to penalize cash accumulation directly, donations decrease because NPOs with excess cash holdings increase their administrative spending and reduce their fundraising intensity.