What Effect Did AIG's Bailout, and the Preceding Events, Have on Its Competitors?

Abstract

We examine the effect of AIG’s bailout, and the events leading up to it, on its insurance industry rivals. The reaction of rivals to AIG-related events depends on the relative strength of two competing effects. The contagion effect implies that rival returns will decrease following negative events affecting AIG. In contrast, competitive effects will occur if investors expect that rivals will be able to benefit from AIG’s downfall. Using a three-factor multivariate regression model event study methodology we find evidence of both effects around several key dates in AIG’s decline.

Keywords: American International Group (AIG), Competitive Effects, Contagion Effects.