Testing the Consistency in Rating Methodology: A Study of Rating Agencies in India

Abstract

The credit rating agencies evaluate the intrinsic worth of a company and assign ranks to the companies accordingly. These agencies have become important in view of the increasing number of companies going to the public for funds and also due to government stipulating that corporate bodies wanting to raise funds from the market should have their debt instrument rated. These agencies provide unbiased assessment of credit worthiness of the companies issuing debt instruments and thus restore the confi dence in the capital market. The main objective of the paper is to assess the consistency in rating methodology of rating agencies by taking companies belonging to different rating (between group) classes as sample. It has been revealed in the study that there has been inconsistency in the methodology adopted by all the four rating agencies while assigning different rating grades. Keywords: Credit Rating, Credit rating agencies, Consistency, Solvency ratios, Profi tability ratios.

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