ANNOUNCEMENTS OF ASSET-QUALITY PROBLEMS AND CONTAGION EFFECTS IN THE LIFE-INSURANCE INDUSTRY

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