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Opioid crisis effects on local firms’ risk

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Abstract

This study investigates the impact of the opioid crisis on local firms’ risk and payout flexibility using a sample of 4094 U.S. firms headquartered in 542 counties. We find that firms headquartered in counties with higher opioid mortality rates are associated with higher risk than those with lower opioid mortality rates. This association is more prominent for states severely inflicted by opioid abuse and firms with very high risk. Moreover, firms headquartered in counties with higher opioid mortality rates use more flexible payout policies that favor share repurchases over dividends than those in counties with lower opioid mortality rates. Further, opioid abuse increases local firms’ risk by increasing labor costs. Besides, the staggered passage of state opioid laws mitigates the impact of opioid abuse on firm risk and payout flexibility. The above findings suggest that the opioid crisis raises local firms’ risk, and they respond with more flexible payout policies to improve financial flexibility.

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Notes

  1. See https://www.cdc.gov/opioids/index.html.

  2. See Ho et al. (2023) for more details on the role of pandemic in affecting defaut risk.

  3. See https://www.nist.gov/standardsgov/compliance-faqs-federal-information-processing-standards-fips.

  4. See https://www.census.gov/programs-surveys/decennial-census/data/datasets.2010.html; https://www.bls.gov/lau/.

  5. See https://www.congress.gov/search?q=%7B%22source%22%3A%22legislation%22%7D.

  6. See https://www.huduser.gov/portal/datasets/usps_crosswalk.html.

  7. The detailed estimation procedure is provided on the following website: https://www.cdc.gov/nchs/data-visualization/drug-poisoning-mortality/#ref1.

  8. Li and Zhu (2019) and Cornaggia et al. (2022) also examine opioid mortality rate.

  9. We use the X13 method provided by the U.S. Census Bureau to deseasonalize quarterly ROA.

  10. Detailed information on state opioid laws is provided in the Appendix.

  11. The average population of headquarter counties is 14 times higher than the average U.S. county population over 2003–2018, consistent with the notion that firm headquarters tend to cluster in metropolitan areas with relatively high populations.

  12. Since firm risk influences payout decisions (Ikenberry and Vermaelen 1996; DeAngelo et al. 2006), we include as control variables the four risk factors used in the previous models: Size, MB, ROA, and Investment.

  13. We follow Fama and French (1997) to categorize all public firms into 48 industries based on their SIC codes.

  14. As 16% (48%) of the sample firm years have a 0% (100%) payout flexibility, these observations are excluded to make the quantile regression results meaningful, which shrinks the sample size from 25,327 to 9,213.

  15. For more discussions about the possible biases of ordinary staggered DiD analysis, see Baker et al. (2022).

  16. To match the timeline in Panel A, we randomly sample opioid law passing years from the set {2016, 2017} for each state using a Bernoulli distribution.

  17. We collect opioid prescription data from CDC.

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Author information

Authors and Affiliations

  1. EM Normandie Business School, Métis Lab, Paris, France

    Sabri Boubaker

  2. International School, Vietnam National University, Hanoi, Vietnam

    Sabri Boubaker

  3. Swansea University, Swansea, UK

    Sabri Boubaker

  4. EDC Paris Business School, Paris, France

    Zied Ftiti

  5. Texas State University, San Marcos, USA

    Yifan Liu

  6. ESSCA School of Management, Angers, France

    Wael Louhichi

Authors
  1. Sabri Boubaker
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  2. Zied Ftiti
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  3. Yifan Liu
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  4. Wael Louhichi
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Correspondence to Wael Louhichi.

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Appendix: Variable definition

Appendix: Variable definition

We construct all variables at an annual frequency.

  • OpioidMortality: the number of opioid overdose deaths per thousand population. The National Center for Injury Prevention and Control (NCIPC) of the Centers for Disease Control and Prevention (CDC) uses hierarchical Bayesian models with spatial and temporal random effects to estimate the number of opioid overdose deaths. The detailed estimation procedure is provided in the next subsection.

  • StockVolatility: the standard deviation of daily stock returns.

  • ROAVolatility: the standard deviation of deseasonalized quarterly ROA. ROA is the ratio of income before extraordinary items to total assets.

  • PayoutFlexibility: the share repurchase to total payout ratio. Share repurchase is computed as the expenditure on the purchase of common and preferred stocks minus any reductions in the redemption value of preferred stocks. Total payout is the sum of dividends on and buybacks of common stocks.

  • Size: market capitalization (in logarithm). Market capitalization is the product of the closing price and shares outstanding in a given year.

  • MB: the market-to-book ratio, computed as market capitalization scaled by the book value of equity.

  • ROA: return on assets computed as income before extraordinary items scaled by total assets.

  • Investment: the growth rate of total assets.

  • Sales: sales revenue scaled by total assets.

  • EBITDA: earnings before interest, taxes, depreciation, and amortization scaled by total assets.

  • Leverage: financial leverage computed as total debt scaled by total assets.

  • Cash: cash holdings are computed as cash and short-term investments scaled by total assets.

  • StockReturn: average daily stock return.

  • RE/TE: the retained earnings to total common equity ratio.

  • StockLiquidity: average daily stock turnover. Stock turnover is computed as stock trading volume divided by shares outstanding.

  • Employee: the number of employees in thousands.

  • LaborCost: total staff expense scaled by total assets.

  • BorrowCost: total interest expense scaled by total assets.

  • Population: population (million) based on postcensal estimates from the 2010 U.S. census.

  • PopulationDensity: population density (thousand per square mile) based on postcensal estimates from the 2010 U.S. census.

  • Income: income (million per capita) based on the Local Area Unemployment Statistics (LAUS) from the Bureau of Labor Statistics (BLS).

  • Unemployment: The unemployment rate is based on the Local Area Unemployment Statistics (LAUS) from the Bureau of Labor Statistics (BLS).

  • Crime: crime rate (per thousand population) from the Federal Bureau of Investigation (FBI).

  • Health: health insurance coverage rate of adults aged 19–64 from CDC.

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Boubaker, S., Ftiti, Z., Liu, Y. et al. Opioid crisis effects on local firms’ risk. Rev Quant Finan Acc (2023). https://doi.org/10.1007/s11156-023-01208-6

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