Question

What do you believe are the consequences of a rating downgrade? Are rating agencies always accurate? What was the result of the downgrades? Why?

Answer 1

A rating downgrade means giving a negative rating to the securities, companies or the nation. The consequences of rating downgrade are securities selling at bigger discounts, investors not trusting the securities or companies and difficulties in generating funds from public. Rating downgrade also makes a consequence of difficulty in getting FDI for a nation as foreign investors become doubtful about the business environment of the company.

Rating agencies are not always accurate, as they rate entities on the basis of financial performance, the questionnaire asked with the answers and interaction with the management people. Here, the accuracy is negatively affected if there is a time lag in showing the ratings, answers not interpreted correctly and accounts already manipulated by the company. In this case, rating agencies, will not get the right information and their rating will not be accurate.

Due to downgrade, attracting investors become difficult and it happened, because they thought that their funds may be trapped or they can incur losses as their is a downgrade.