Government provided credit ratings and foreign sales: Evidence from China

Abstract

The existing literature pays much attention to the credit rating given by market-oriented credit rating agencies, but largely ignores the effect of government-oriented credit rating. Recently, State Taxation Administration of China gives a government provided credit rating for all the Chinese firms. This practice provides a valuable context for us to shed light on the theoretical void of credit ratings given by the government. Using a hand-collected database from China, we find that A-level rated firms acquire nearly 69 % more foreign sales than non-A-level rated firms. Our findings support information channel, trust channel, government efficiency channel and financing constraints channel. Furthermore, the impact of government given credit ratings on a firm’s foreign sales is stronger when firms locate in a province with lower intensity of international trade, when firms are smaller and when firms hire less directors with oversea background. Finally, we examine how the domestic market interplays with the foreign market. We find that domestic sales will also increase but the magnitude is smaller. Overall, the credit rating given by the government could help a firm penetrate into the global market when most firms in a country are not covered by international credit rating agencies.