Junk bonds, life insurer insolvency, and stock market reactions: The case of first executive corporation

The First Executive Corp. was the largest failure in the history of the life insurance industry. The company was one of the most aggressive purchasers of junk bonds through the 1980s and was the first of several large failures in the staid life insurance industry. The effect of First Executive's failure on the value of companies in the life insurance industry is examined. It is found that the price of other life insurance companies' stock was negatively affected by the earnings announcement that preceded First Executive's failure. The magnitude of an individual company's reaction to First Executive's loss varies according to the proportion of the company's assets invested in junk bonds, the proportion of the company's assets invested in real estate, and the financial strength of the company as measured by A.M. Best's rating.