Credit Rating effect of awareness and perception on investment decisions among equity investors in Kerala

Abstract

Increasing varieties of instruments and the growth of financial market created not only the opportunities for the investors but also complexities in the market. To reduce the complexity of financial instruments, to facilitate the investors to take informed investment decisions and to enable the companies to mobilize the required funds, various credit rating agencies emerged across the globe. Credit rating denotes an independent opinion of an agency on the issuer’s capability to repay its financial commitments. Rating agencies evaluate the firm’s business position, industry and competitive factors, strategic programs and thereby provide reliable assessments of firm’s financial creditworthiness over the foreseeable future. The availability of clear and accepted indicators of the risk of default helps investors to make investment decision. Even though the credit rating helps the investors to take investment decision, there are number of occasions of failure to make timely prediction and inbuilt problem with credit rating system. The failure of the rating system was noticeable during the 2008 financial crisis, the Enron scandal in 2001, the collapse of Kingfisher Airlines, DHFL, Eros, Suzlon Energy, Amtek Auto, Zee Group, RCom, and most recently IL&FS. The expanding business of CRAs and the close relationship between issuers' managing directors and CRAs' management may also be contributing factors. In India, there is a growing perception that CRAs have become overly generous in awarding ratings, raising concerns about their authenticity, honesty, and utility. By doing so, CRAs have not only lost the trust of investors but also their credibility. The present study examines the awareness and perception of investors towards credit rating and its influence on their investment decision. The present study is descriptive and analytical in nature. The study is based on both primary and secondary data. Primary data is collected from equity investors in Kerala using questionnaire. Secondary data required for the study were compiled from official website of CRISIL, ICRA, CARE and SEBI, research dissertation and thesis, periodicals, study report, books related to study area, journals and other websites. 400 equity investors from six selected districts in Kerala were selected for the study. The pilot study and pre-test were conducted to check the validity, reliability, and normality requirements. The primary data have been analyzed using statistical tools such as percentage analysis, mean, standard deviation, Levene’s test of Homogeneity of Variance, Independent Sample ‘t’ test, One-way ANOVA, Tukey HSD Post-hoc test for Multiple Comparison, Chi square test. Furthermore, Confirmatory Factor Analysis and Structural Equation Modelling are used as the statistical techniques to identify the relationships and measurement models of the variables respectively. The report of the research work is presented in nine chapters. Research indicates a potential need for increased transparency efforts and better communication between Credit rating agencies and investors to strengthen trust and understanding in the industry. Educating investors about CRA methodologies and their working can contribute to a more informed and confident investor base when engaging with credit rating agencies. The investors are also to be educated on how to make the decisions by using rating. The investors point out that that there is a need for periodic rating revisions. The respondents are concerned about the negative impact of downgrading and frequent rating changes on a company's image and investor confidence. Results suggest that while some believe in the usefulness of ratings in investment decisions, there's a more mixed opinion regarding their impact on market efficiency and market-moving potential. The findings underscore the importance of clear and well-explained rating practices in maintaining investor confidence also highlighting the varied perspectives on the immediate market impact of rating announcements. The SEM model proposed for testing the impact of Awareness on different dimensions of Perception demonstrates that there is significant positive causal relationship between the Awareness of investors and their Perception related to credit rating. The findings denote that there is no significant but positive influence of investors’ awareness on credit rating and their Investment Decision based on credit rating. Further, it shows that there is significant positive causal relationship between the Perception of investors and their Investment Decision related to credit rating. The study provides implications for Regulators, Credit Rating Agencies and investors.