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Market Reaction to Regulatory Action in the Insurance Industry: The Case of Contingent Commission

Authors

  • Jiang Cheng,

    1. Jiang Cheng is with Shanghai Jiao Tong University. Elyas Elyasiani and Tzu-Ting Lin are with Temple University. The authors can be contacted via e-mail: jcheng@sjtu.edu.cn, elyas@temple.edu, and tzuting@temple.edu, respectively. We are grateful to Georges Dionne (the editor) and three anonymous referees for many constructive comments and suggestions, which helped improve the quality of the article. We also appreciate valuable comments from David J. Cummins, James C. Hackard, J. Tyler Leverty, Weili Lu, Laureen Regan, May A. Weiss, Xiaoyin Xie, and seminar participants at California State University, Fullerton, ARIA 2007 and the EFA 2008 annual meetings. All errors are ours.
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  • Elyas Elyasiani,

    1. Jiang Cheng is with Shanghai Jiao Tong University. Elyas Elyasiani and Tzu-Ting Lin are with Temple University. The authors can be contacted via e-mail: jcheng@sjtu.edu.cn, elyas@temple.edu, and tzuting@temple.edu, respectively. We are grateful to Georges Dionne (the editor) and three anonymous referees for many constructive comments and suggestions, which helped improve the quality of the article. We also appreciate valuable comments from David J. Cummins, James C. Hackard, J. Tyler Leverty, Weili Lu, Laureen Regan, May A. Weiss, Xiaoyin Xie, and seminar participants at California State University, Fullerton, ARIA 2007 and the EFA 2008 annual meetings. All errors are ours.
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  • Tzu-Ting Lin

    1. Jiang Cheng is with Shanghai Jiao Tong University. Elyas Elyasiani and Tzu-Ting Lin are with Temple University. The authors can be contacted via e-mail: jcheng@sjtu.edu.cn, elyas@temple.edu, and tzuting@temple.edu, respectively. We are grateful to Georges Dionne (the editor) and three anonymous referees for many constructive comments and suggestions, which helped improve the quality of the article. We also appreciate valuable comments from David J. Cummins, James C. Hackard, J. Tyler Leverty, Weili Lu, Laureen Regan, May A. Weiss, Xiaoyin Xie, and seminar participants at California State University, Fullerton, ARIA 2007 and the EFA 2008 annual meetings. All errors are ours.
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Abstract

We examine the market's reaction to New York Attorney General Eliot Spitzer's civil suit against mega-broker Marsh for bid rigging and inappropriate use of contingent commissions within a generalized autoregressive conditionally heteroskedastic (GARCH) framework. Effects on the stock returns of insurance brokers and insurers are tested. The findings are: (1) GARCH effects are significant in modeling broker/insurer returns; (2) the suit generated negative effects on the brokerage industry and individual brokers, suggesting that contagion dominates competitive effects; (3) spillover effects from the brokerage sector to insurance business are significant and mostly negative, demonstrating industry integration; and (4) information-based contagion is supported, as opposed to the pure-panic contagion.

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