Tax credit rating and corporate innovation decisions

Abstract

The tax credit rating mechanism was formally implemented in 2014. As an important tax collection and management innovation, it has attracted the attention of regulatory authorities and scholars. Different from the literature that directly examines corporate tax compliance, we focus on the impact of tax credit rating implementation on corporate research and development (R&D) investment decisions. Using listed companies’ data from 2014 to 2019, we find that companies with higher tax credit ratings invest more in innovation, because the system helps managers identify R&D opportunities, alleviates corporate financing constraints and reduces agency costs. We confirm that tax credit ratings have manifold impacts on corporate information environments and business decisions, with better ratings positively affecting firms’ business decisions. This discovery can inform tax policy reform, encourage corporate innovation and construct social credit systems.