Abstract:

: We extend the performance comparison study of nonprofits (NPs) and pass-throughs by examining large NPs and large C corporations (CCs). Unlike that study, we also examine performance outcomes under two different tax shield policies. We use the Capital Structure Model as our main methodology. Our purpose is to compare large NPs with large CCs in terms of debt choice, valuation, leverage gain, and growth-related outcomes. All tests considered, NPs (compared to CCs) have a 34.90% valuation advantage; achieve a 78.12% greater increase in value when going from nongrowth to growth (using a 12.34% lower plowback ratio and 10.97% less in retained earnings); attain a 2.56% greater optimal leverage ratio; and, realize 10.97% less in dollars added from debt. We show that switching from an interest tax shield to a retained earnings tax shield increases CC value between 1.35% and 3.28%. The NP value limit is only 0.42% since NPs pay little taxes. Our findings are value-additive for the comparative ownership form research.

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