Opioid crisis and firm downside tail risks : evidence from the options market

Abstract

This paper explores 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 legislations, supporting a causal interpretation. Further analysis shows the effects that occur through a labor channel are stronger for firms with higher labor intensity, lower labor supply, and lower workplace safety.