Tax credit rating changes and the cost of debt financing: Evidence from China

Difficulties in financing and tax burden are the main factors that constrain the operational efficiency and development of companies, which hinder the healthy growth of the Chinese economy. Can a win–win situation be achieved by changing tax policies? Our paper uses a sample of A-share listed companies from 2015 to 2021 to examine the relationship between changes in tax credit ratings and corporate debt financing costs. The empirical results show that an improvement in a company’s tax credit rating reduces its debt costs, whereas a downgrade in the rating negatively impacts and increases the company’s debt costs. Mechanism analysis indicates that changes in ratings mainly influence corporate debt financing costs through variations in operational risk and default risk. When the rating improves, both operational risk and default risk are effectively mitigated, whereas a downgrade negatively impacts these risks. Further analysis demonstrates that the impact of rating changes on corporate debt financing costs is more pronounced in non-state-owned enterprises, diversified companies, and those located in regions with poorer legal environments. Our paper not only enriches the literature on changes in tax credit ratings but also provides evidence for the positive externalities of integrity.