Nonprofit performance report cards, such as charity ratings, have evolved in the third sector as an attractive tool for addressing accountability concerns and improving the sector's effectiveness and efficiency. These performance monitoring services intend to increase the quality of philanthropy by helping donors allocate contributions to high-quality charities and getting organizations to improve their performance. However, we know little about how performance report cards as a policy instrument fulfill their expectations in the nonprofit sector.

This research offers a comprehensive study of charity ratings that addresses three sets of questions. First, it explores the information content of charity ratings and assesses the degree of coherence among performance grades assigned by different rating services. The analysis of data shows that the informational content of charity performance ratings is lower than it appears on face value, and competing rating systems often send mixed signals to donors.

Second, it examines whether and how conventional metrics embedded in charity ratings, particularly composite ratings and overhead spending ratios, influence perceived performance, trust, and giving decisions in individual donors. The findings show that individuals consider both ratings and overhead ratios when making decisions but give the ratings more weight. The study also reveals distinct patterns in donor reactions to low and high values on each of the two measures, interactions between them, and a moderating role of altruism, general trust, and mission valence.

Finally, the study investigates how rated nonprofits respond to their ratings. It proposes that a public charity will react to an exogenous shock - the release of its charity rating by improving its measured performance, especially if it (1) initially gets a poor rating, (2) is in a highly competitive subfield, (3) relies more heavily on donations. The empirical tests show that public charities only respond in a limited way to being publicly rated, meaning limited effectiveness of the existing tool to elicit performance improvements in nonprofits. At the same time, the statistically and practically significant findings for the charities that initially receive the lowest ratings show that third-party nonprofit performance monitoring has some potential.