Does Nonprofit Status Signal Quality?

A popular theory for why firms take nonprofit status is that it is a signal of quality. This paper offers a simple, empirical test of this theory. If nonprofit status signals quality, surely nonprofit firms would want to ensure that consumers are aware of this. A natural way for firms to do this is to indicate their nonprofit status in their advertising. Taking this cue, we conducted a survey of over 2,800 firms in the hospital, nursing home, or child care industries in order to determine whether nonprofit firms communicate their status to consumers on their Web sites or yellow pages listings. We find that fewer than 7.5 percent of nonprofit firms signal their status in yellow pages listings, only 25 percent do so on their home pages, and 30 percent do so on their about-us pages. Indeed, over 35 percent never signal their nonprofit status on their Web sites. Our evidence does not support the hypothesis that nonprofit status is a signal of quality.