Do government provided credit ratings enhance or impede a firm's access to trade credit?

Abstract

The Chinese tax authority assigns a credit rating to a firm by evaluating its tax compliance. This paper investigates whether a higher credit rating provided by the government (e.g., rating A-level versus rating non-A-level) enhances a firm's access to trade credit. Using a unique database manually collected from China, we find that firms with an A-level rating are able obtain more trade credit from their suppliers compared with non-A-level firms. Our findings suggest that social trust and media attention are two plausible channels for the government's credit rating effect. We also find that this effect is stronger when firms are not rated by a credit rating agency, when firms receive lower credit ratings from a credit rating agency, when firms have a weaker information environment and when firms are non-SOEs. Finally, we find that firms that receive higher credit ratings from the government also provide more trade credit to their customers. Overall, our study shows that government can play a vital role in disseminating credible information to stakeholders when credit rating agencies are less reliable in emerging market countries.