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Opioid Crisis and Firm Downside Tail Risks: Evidence from the Option Market

Author

Listed:
  • Jie Cao

    (The Hong Kong Polytechnic University - School of Accounting and Finance)

  • Amit Goyal

    (University of Lausanne; Swiss Finance Institute)

  • Yajing (Stella) Wang

    (The Hong Kong Polytechnic University - School of Accounting and Finance)

  • Xintong Zhan

    (Department of Finance, School of Management, Fudan University)

  • Weiming Elaine Zhang

    (IE Business School - IE University)

Abstract

We explore how the opioid crisis exposure affects firm downside tail risks implied from equity options. Using a large sample of U.S. public firms from 1999 to 2020, we find that firms headquartered in regions with higher opioid death rates face higher downside tail risks, i.e., the cost of option protection against left tail risks is higher. The effects are reversed following exogenous anti-opioid legislation, supporting a causal interpretation. Further analysis shows that the opioid crisis heightens firm risk by lowering labor productivity. We document more pronounced impacts among firms with higher reliance on labor, limited local labor supply, and lower workplace safety.

Suggested Citation

  • Jie Cao & Amit Goyal & Yajing (Stella) Wang & Xintong Zhan & Weiming Elaine Zhang, 2024. "Opioid Crisis and Firm Downside Tail Risks: Evidence from the Option Market," Swiss Finance Institute Research Paper Series 24-74, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2474
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    More about this item

    Keywords

    Opioid crisis; downside risk; equity options; labor productivity; labor supply;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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