Nonprofit classification decisions in response to a change in accounting rules

This study analyzes the response of nonprofit managers to a change in accounting regulation. A 1990 change in hospital accounting rules disclosed new information about bad debt and charity care expenses. This change provided managers with incentives to reclassify some bad-debt expense to charity care. Using univariate and multivariate analyses, we find that nonprofit managers respond to their current cash position when making classification decisions to disclose bad-debt expense and charity care amounts. While we expected that charity care levels would influence these managers differentially, cash levels appear to be more important in their disclosure decision making.