“An Enquiry into AAA Rated Companies”
Priya, Ragia Afrin
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Credit rating evaluates the credit worthiness of a debtor, especially an individual, a business or a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default. Over the years, the number of credit rating agencies (CRA) has increased by several folds, from only two in 2009 to eight in 2015. As a result, the competition among the CRAs for market share has become severe. As credit rating is very sensitive to quality, this increase competition may lead to deteriorated or inflation ratings by the CRAs to retain its clients and keep the cash-flow unharmed. Credit rating plays a vital role in developing the financial markets, regulating the financial markets, estimating risk premium, enhanced transparency in the credit and fixed income securities market, and standardization of credit evaluation process. However, there are also some drawbacks of the credit rating. These drawbacks include that credit rating can be biased, in absence of proper knowledge management by the credit rating companies changing the concerned analyst of a rating assignment may lead to discrepancies, and credit ratings cannot be treated as a standalone measure to invest. An analysis on the financial variables of the AAA rated companies has been conducted to find out whether the financial variables and the rating provided are consistent or not. The analysis compares the most important ratios i.e. Quick ratio, Times Interest Earned Ratio, Days of Sales outstanding Ratio, P/E ratio, Sustainable growth rate and the z score of the AAA rated companies. The trend of these financial variables over the last five years has been observed and the mean and sigma of these ratios over the five years has been compared. F test is used to test various hypotheses regarding the consistency of the mean and variance of the financial indicators of the AAA rated companies. Finally, it was found that no consistent relationship lies between the financial indicators of the AAA rated companies and the ratings provided to them. Rather the relationship is ambiguous and inconsistent in nature. This raises the question whether to believe the credit rating or to believe the standards of the financial indicators.
- Journal of law