We address the impact of financial flexibility on organizational performance in a not-for-profit (NFP) setting. Specifically, we examine the link between donor-imposed financial inflexibility and subsequent donations. Donors sometimes impose restrictions on NFP use of the donated resources. These restrictions arise because of donors' preferences regarding how the assets are used, or as a mechanism for donors to monitor the actions of NFP management. Restricted donations cause financial inflexibility and limit managerial discretion. We examine the costs and benefits of restricting managerial discretion and find a negative relation between future donations and high levels of donor restriction. Specifically, we empirically demonstrate that when restricted assets comprise a high percentage of total assets, additional increases in restricted assets are associated with an overall reduction in future donations.

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