Abstract
This paper studies how newspaper reports on embezzlement affect donations received by nonprofit organizations. Based on a unique data set on wrongdoings by top managers in nonprofits between 1995 and 2002, I estimate that annual donations decrease by 42.4% after a news report on embezzlement. I account for the possibility that news reports may affect fund raising efforts by estimating the effect on the cost of raising donations. I find that a news report increases the cost of raising one dollar by 4.80 cents on average. These findings provide evidence that the cost of weak governance is very high in nonprofit organizations. Furthermore, my results confirm that image enhancement is an important motive for donations.