Question

What are the disadvantages of high image rating ?

Answer 1

It benefits the image of the company as increased S/Q rating and having a lower price is directly associated with reaching the aim of acquiring a high image rating. When 5 teams are competing, it is important for each to aim for at least 20% market share in each and every segment.

Disadvantages of high image rating :

Difference in rating of two agencies:

Rating done by the two different credit rating agencies for the same instrument of the same issuer company in many cases would not be identical. Such differences are likely to occur because of value judgement differences on qualitative aspects of the analysis in tow different agencies.

Temporary adverse conditions reflection:

Time factor affects’ rating, sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company’s interest

Down grade:

Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairiring the image of the company.

Human bias:

Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

For soundness of company rating is no guarantee:

Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the user public in general of the rating symbol

Static study:

Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company’s health through rating is momentary and anything can happen after assignment of rating symbols to the company.

Dependence for future results on the rating, therefore defeats the very purpose of risk indicativeness of rating. Many changes take place in economic environment, political situation, government policy framework which directly affect the working of a company.

Material information concealment:

Rating Company might conceal material information from the investigating team of the credit rating company. In such cases quality of rating suffers and renders the rating unreliable.

Misrepresentations & biased rating:

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that the reports impartial and judicious recommendations for rating committee.

The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such cases the investor cannot get information about the riskness of instrument and hence is at loss.