Announcements of Asset-Quality Problems and Contagion Effects in the Life Insurance Industry

29 Pages Posted: 23 Apr 2007 Last revised: 9 Nov 2008

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

George W. Fenn

Cambridge Finance Partners

Abstract

We investigate contagion effects in the stock returns of life insurance companies at the time of announcements by First Executive and Travelers of significant problems in their investment portfolios. We first demonstrate that investments in junk bonds or commercial mortgages are important for shareholder wealth effects of other insurance companies. We then directly link the shareholder wealth effects to characteristics of the firms' customers. Our evidence shows that effects on shareholder wealth are larger for companies with significant junk bond/commercial mortgage assets and readily mobile customers as represented by guaranteed investment contracts (GICs).

Keywords: contagion, disintermediation, life insurance, writedowns

JEL Classification: G14, G22

Suggested Citation

Cole, Rebel A. and Fenn, George W., Announcements of Asset-Quality Problems and Contagion Effects in the Life Insurance Industry. Journal of Financial Economics, Vol. 35, No. 2, 1994. Available at SSRN: https://ssrn.com/abstract=981280

Rebel A. Cole

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

George W. Fenn (Contact Author)

Cambridge Finance Partners ( email )

Cambridge, MA 02139
United States
617-575-6613 (Phone)

HOME PAGE: http://www.cambridgefinance.com

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