Definition:

A rating agency is a company that has been given special authority from the government to rate securities such as stocks and bonds, based on risk and pricing. The higher the rating, the lower the theoretical risk of default, which generally means a lower interest rate for the the company issuing the stock or bond. Thus, companies with high credit ratings have a substantial strategic advantage in the form of lower cost of capital that allows them to raise money at cheaper rates and earn higher returns on equity and assets.