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Sustainable Asset Growth and the Accounting Rate of Return in Not-For-Profit Organizations: Theory and Evidence

Author

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  • Gerard Wedig
  • Soonman Kwon

Abstract

Parties needing to monitor the financial performance of not-for-profit (NFP) organizations have traditionally relied upon financial ratios of accounting data. This practice can lead to misleading inferences about profitability in relation to organizational needs, since accounting rates of return are potentially poor proxies for economic rates of return. In this paper we show how to compensate for the imprecision of the accounting rate of return through the use of a simple interpretive rule based on the finding that accounting and economic rates of return are on the same side of the growth rate. According to our rule, the accounting rate of return must exceed the asset growth rate in order to sustain growth with internally-generated cash flow. Logistic regressions are used to test the rule's ability to predict sustainable asset growth in a sample of NFP hospitals. The findings not only validate the rule, but also show that the rule exploits all usable information contained in the accounting rate of return

Suggested Citation

  • Gerard Wedig & Soonman Kwon, 1995. "Sustainable Asset Growth and the Accounting Rate of Return in Not-For-Profit Organizations: Theory and Evidence," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(3), pages 367-391.
    • Handle: RePEc:taf:ijecbs:v:2:y:1995:i:3:p:367-391
    DOI: 10.1080/758538012
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    More about this item

    Keywords

    Accounting rate of return; Economic rate of return; Growth; Not-for-profit; JEL classifications: G30; L31; M40;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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