Cliff Effect

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Cliff Effect

In economics, the disproportionately positive or negative results of an action. For example, suppose a company takes on too much debt and a credit ratings agency downgrades its bond rating. This may increase the company's borrowing costs significantly, which in turn gives it less cash on hand to make coupon payments. This can lead to a further downgrade and the cycle continues. The cliff effect implies that relatively little separates a company from being seen as quite healthy to being seen as a poor investment.

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