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Date Published:Jul 1, 2006
In the absence of owners, how effective are the constraints imposed by the state in promoting effective firm governance? This paper develops state-level indices of governance environment facing not-for-profits and examines the effects of these rules on not-for-profit behavior. Stronger provisions aimed at detecting managerial misbehavior are associated with significantly greater charitable expenditures, increased foundation payouts and lower insider compensation. Instrumental variables analysis confirms the relationship between the governance environment and not-for-profit performance. The paper also examines how governance influences an alternative metric of not-for-profit performance—the provision of social insurance. Stronger governance measures are associated with intertemporal smoothing of resources and greater activity in response to negative economic shocks.