Sources of Funding and Monitoring Effects on Nonprofit Organisations from an Agency Perspective

Nonprofit Organisations (NPOs) receive their funding in three major types: government subvention, donations and fees collected for services provided. While the contributors do not normally act as the decision agents, the potential existence of agency problem has to be dealt with. This paper investigates whether effective monitoring of principal‐agent relationship exists in NPOs in Hong Kong, which may be perceived to be attached to different types of funding provided to NPOs. While findings from previous studies suggest that NPOs' expense level will be low when they are subject to external monitoring, our results reveal that the expense level of NPOs is similarly associated with the type of funding. More specifically, sizeable donations induce a perception of effective external monitoring on the decision agents, which leads to the adoption of a lower expense level. On the other hand, due to the weak control that can be imposed by existing regulatory framework and disclosure requirements, government subvention and fees collected do not seem to impose any effective monitoring effects on NPOs.