Description:
<jats:title>Abstract</jats:title><jats:p>The State Taxation Administration (STA) of China established the tax credit rating system in 2015. Together with the banking regulatory authorities, STA entitles the higher‐level firms to favourable bank lending. We find that higher‐level firms are positively associated with capital investment, R&D expenditures and employment. These effects are more pronounced in private firms, small firms, and financially constrained firms. We identify that firms rated higher‐level receive more debt financing at lower cost, and hoard less cash for the precautionary reasons. Our findings highlight the importance of the government rating, especially a developed credit rating market in which is absence in emerging economies.</jats:p>