N°24-74: Opioid Crisis and Firm Downside Tail Risks: Evidence from the Option Market

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.