Are shareholders indifferent to the increases in financial risk across the debt categories of the firm?

Answer 1

Shareholders are very sensitive to this and when changes take place that are negative a stock can fall in price (and keep falling for that matter). Astute investors pay attention to the details of the company seeking early clues to problems the company may acknowledge several weeks or months down the road. Investors and the market do not like unwelcome surprises.

To keep it simple, no shareholders should be indefferent to any change in a firms financial condition. A decrese in a firms credit/financial strength rating or a corporate debt downgrade is no different than a drop in your personal credit score. A drop in your credit score means you will pay a higher interest rate on all borrowing. This is the case for a firm who's increased financil risk leads to the downgrade, the firm will need to pay a higher interest rate on all borrowing. This esentially means (relitively speaking) the firm is not in the optimal position to fulfill its current debt obligations, long and or short term and as such there is a higher default risk to the debt holders who will require a higher interest rate to make the risk attractive. This impacts a shareholder because this whole process is set into motion by the weakend financil condition of the firm, credit ratings are not arbitrairily downgraded. The downgrade puts further strain on the firms financil condition due to the increased interest rate it must pay on corporate debt. For an example look at GM's stock price after the before and after the first, second downgrade.

A prudent shareholder / investor should never be uninformed and/or unconcerned when events or corporate actions or inaction effects the financial health of the

corporation.

Those who owned GM bonds might have very strong feelings on this subject.

Consider that, by definition, a bond is a promise to repay monies and bond holders

have legal rights. Or they used to.

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