INTRODUCTION:

The link between credit risk and return patterns on equity markets has incre
asingly become an area of interest. In this project we investigate the existen
ce of a systematic relationship between credit ratings, as indicators of credit
risks, and abnormal equity returns. In particular, we investigate the announc
ement effect on equity returns associated with credit rating changes. Further
more, we contribute to the understanding of the observed announcement eff
ects by relating them to various components of the rating process. Through
sub sample and cross-sectional analyses we gain a deeper understanding of t
he driving forces behind the characteristics of the observed announcement ef
fects. In general, we argue that variations in announcement effects are drive
n by various event and issuer specific characteristics and that these can be r
elated to the relevance and implication of the information as well as the de
gree of market anticipation. Specifically, rating updates driven by changes i
n profitability and market position are more pricing relevant than those moti
vated by changes in capital structure. Also, rating events preceded by officia
l opinions of the likely direction of the rating update have less pricing impa
ct. Based on these two dimensions we identify several additional aspects of
the credit rating process with implications for the impact on equity returns.
These explanatory factors provide the foundation for a comprehensive analy
sis of the asymmetric reactions between upgrades and downgrades as well a
s for the cross-sectional variations for both rating events.
However, credit ratings are only opinions and not recommendations to buy,
sell, or hold a security, High ratings are not a guarantee that an entity is a
safe investment. Even an entity with an AAA rating (the highest) has appro
ximately one chance in 600 of default over a five-year period. The differenc
es in credit quality increase with each category lower down the scale, which
is reflected in the default frequencies measured of the individual categories.
For example, over an 18-year period, from 1971 to 1988, there were no on
e-year defaults in the AAA or AA category.
In fact, the rating is an opinion on the future ability and legal obligation of
the issuer to make timely payments of principal and interest on a specific fi
xed income security. The rating measures the probability that the issuer will
default on the security over its life, which depending on the instrument ma
y be a matter of days to 30 years or more. In addition, longterm rating inco
rporates an assessment of the expected monetary loss should a default occur
. Credit rating helps investors by providing an easily recognizable, simple to
ol that couples a possible unknown issuer with an informative and meaningf
ul symbol of credit quality. Credit rating can be defined as an expression, t
hrough use of symbols, of the opinion about credit quality of the issuer of s
ecurity/instrument. Credit rating does not amount to any recommendation to
purchase, sell or hold that security. It is concerned with an act of assigning
values by estimating worth or reputation of solvency, and honesty to repose
trust in a person's ability and intention to repay.
The ratings assigned are generally regarded in the investment community as
an objective evaluation of the probability that a borrower will default on a
given security issue. Default occurs whenever a security issuer is late in ma
king one or more payments that it is legally obligated to make. In the case
of a bond, when any interest or principal payment falls due and is not mad
e on time, the bond is legally in default. While many defaulted bonds ultim
ately resume the payment of principal and interest, others never do, and the
issuing company winds up in bankruptcy proceedings. In most instances, hol
ders of bonds issued by a bankrupt company receive only a part amount on
his investments, invested, once the company's assets are sold at auction. Th
us, the investor who holds title to bankrupt bonds typically loses both princi
pal and interest. It is no wonder, then, that security ratings are so closely fo
llowed by investors. In fact, many investors accept the ratings assigned by c
redit agencies as a substitute for their own investigation of a security's inves
tment quality.
A poor credit rating indicates a high risk of defaulting on a loan, and thus l
eads to high interest rates or the refusal of a loan by the creditor. In countri
es such as the United States, an individual's credit history is compiled and
maintained by companies called credit bureaus. In the United States, credit
worthiness is usually determined through a statistical analysis of the availabl
e credit data. A common form of this analysis is a 3-digit credit score provi
ded by independent financial service companies.
SIGNIFICANCE OF STUDY:
The aim of this project is to provide further insights to the link between cre
dit risks and the corresponding impact on equity returns. In particular, our a
im is to study the impact of credit rating changes on abnormal equity return
s around the time of the announcement. For the purpose of identifying the f
actors of relevance for potential links between indicators of credit risks and
return patterns on equity markets, various aspects of the credit rating proces
s are analysed and interpreted with focus on the impact on equity investors
to investigate whether there is a systematic and robust link between indicato
rs of credit risk and to explain the dynamics of a potential relationship base
d on observable characteristics.
Also to know how credit rating assesses the credit worthiness of an individ
ual, corporation, or even a country. Credit ratings are calculated from financ
ial history and current assets and liabilities. Typically, a credit rating tells a
lender or investor the probability of the subject being able to pay back a lo
an. However, in recent years, credit ratings have also been used to adjust in
surance premiums, determine employment eligibility, and establish the amou
nt of a utility or leasing deposit.
Further, to know how the rating will differ for different instruments to be is
sued by the same company, within the same time span. For example, credit
rating for a debenture issue will differ from that of a commercial paper or c
ertificate of deposit for the same company because the nature of obligation
is different in each case. Credit rating has been made mandatory for issuanc
e of the following instruments.
How ratings are used by brokers for opinions and as a service for their cust
omers. Insurance companies and mutual funds use them in the purchase of s
ecurities even though their own staff prepares investment analysis. Portfolio
managers also use them in security management. Banks depend on them for
their investment in commercial paper. Individual investors depend on them
for their decisions to place fixed deposits. Ratings are bound to assume grea
ter importance with the institutionalization of investors in the form of unit t
rusts, mutual funds, pension and provident funds. The debt has shown consi
derable buoyancy in 1996 not only at the wholesale level (institutional inves
tors) but also at retail level in view of poor offerings of equity in the prima
ry market. This has come about largely on account of the availability of rati
ngs on debt instruments, which boosted investor confidence.
RATIONALE BEHIND SELECTING THE TOPIC:
The purpose behind selecting the topic is that the effects of changes in cred
it rating on equity return is an interesting concept, I would like to study the
relation and roles of credit rating and equity returns. Further, to know abou
t credit rating agencies, their evolution, regualtion, uses and functions. Also
, to know different credit rating agencies and their working.

OBJECTIVES OF THE STUDY:

1. To study the various aspects of credit ratings and equity returns.
2. To study the impact of changes of credit ratings on equity return.
3. To study the process of credit rating.
4. To get an overview about the credit rating agencies.
5. To study the working of credit rating agencies.
6. To study the crticism towards credit rating and agencies
7. To find out the solution to the problems and give suggestions.
RESEARCH METHODOLOGY:
Primary data:
The primary data will be collected through questionnaire prepared that will
be circulated within a sample of 50 respondents that will be randomly selec
ted.
Secondary data:
On the other hand the secondary data will be collected through various publ
ished books, newspaper, magazines etc.
Technique of Analysis:
The data collected through questionnaire will be analysed by various techniq
ues which will be then be presented in a tabular form and by graphs such a
s histogram, pie chart and bar graph etc.
Sample Size:
50 respondents will be selected from Mumbai city for the research process.

SCOPE AND LIMITATION:

1. The survey is limited to Mumbai City.
2. The survey is limited to 100 respondents.
REVIEW OF LITERATURE:
1. Sanket Dhanorkar (2019)1: This article explains about how reliable are
credit ratings and also compares the domestic and international ratings of co
mpanies. In the article it is also discussed that credit rating is not a guarant
ee but simply an opinion of the rating agency.

2. Tania Jaleel (2018)2: This article explains about what are credit rating?
And how is it important? It explains the credit rating scale and the how diff
erent credit ratings agencies give ratings. Also the uses of credit ratings duri
ng investment decision is discussed.

3. Yogita Khatri (2017)3: This article explains about what leads to the do
wngrade of credit ratings? How does it impacts companies? How downgrad
e impacts us? What should we do? And How should comapnies anticipate a
downgrade?. It is also discusses the firms with high debt-equity ratio and f
irms with poor interest coverage ratio.

4. The Hindu, article on credit ratings (2017)4: This article explains abou
t What is a credit rating? Why do countries get credit ratings? What factors
decide these ratings? And Where does India stand now?. It also discusses h
ow India’s credit rating has been upgraded by Moody’s, a global credit rati
n g a g e n c y .

5. The Hindu, article on reliability of credit ratings (2019) 5: This article

explains that Can we rely on credit ratings? How reliable are these assigned
credit ratings?. It also gives details about mutual incentives and fiduciary d
uties.
CHAPTER SCHEME:
1. Chapter I : Introduction and Research Design
2. Chapter II : Introduction to Credit Rating Agencies
3. Chapter III : Working of Credit Rating Agencies
4. Chapter IV : Data Analysis
5. Chapter V : Observation, Conclusion & Suggestion
REFERENCES
1. Sanket Dhanorkar (2019), ‘How reliable are credit ratings?’
https://economictimes.indiatimes.com/wealth/invest/how-reliable-are-credit-ratings/articleshow/6812
2355.cms

2. Tania Jaleel (2018), ‘What is credit rating and how important is it while
making an investment decision?’
https://economictimes.indiatimes.com/wealth/invest/what-is-credit-rating-and-how-important-is-it-w
hile-making-an-investment-decision/articleshow/65806143.cms

3. Yogita Khatri (2017), ‘How credit rating downgrade of companies impact

s your investments and what to do’
https://economictimes.indiatimes.com/wealth/invest/why-credit-rating-downgrade-should-concern-y
o u / a r t i c l e s h o w / 5 8 9 7 4 3 8 3 . c m s ? f r o m = m d r

4. The Hindu (2017) website:

https://www.thehindu.com/specials/the-hindu-explains-what-are-credit-ratings-and-how-are-they-giv
en/article20515882.ece

5. The Hindu BusinessLine (2019) website:

https://www.thehindubusinessline.com/opinion/can-we-still-rely-on-credit-ratings/article28791828.ec
e