UNC Kenan-Flagler Business School Researchers Show Impact of the Opioid Crisis on Firm Value
CHAPEL HILL, N.C. (PRWEB) June 13, 2019 -- In the first study of the impact of the opioid crisis on firms, researchers from the University of North Carolina Kenan-Flagler Business School demonstrate the negative effects of opioid abuse on long-term firm growth, investment and valuation.
UNC Kenan-Flagler researchers Paige Ouimet, associate professor of finance; Elena Simintzi, assistant professor of finance; and Kailei Ye, a PhD student, find:
- Opioid abuse hurts firm growth in U.S. areas heavily affected by the opioid crisis.
- In response, firms in those areas are more likely to invest in automation, technologies that can substitute for labor and mitigate the costs of the reduced labor pool.
- There is a bright side: Firms with employees in areas that pass legislation limiting opioid prescriptions realize positive stock price gains when new laws are announced.
They share their findings in “The Impact of the Opioid Crisis on Firm Value and Investment.”
“One of the societal costs of the opioid crisis is a reduction in the supply of productive workers,” says Ouimet. “We document a negative and significant relation between the growth in opioid prescriptions at the county level and a subsequent change in the supply of workers. Our findings show that opioid abuse makes labor costlier in the areas hardest hit by the opioid crisis.”
The Effects of Laws To Limit Opioids on Firm Value
As of 2018, 25 states have enacted legislation limiting the quantity of opioids which can be prescribed and firms with headquarters in these states benefit, according to the study. And those that benefit the most from the state laws are less capital intensive and so are more exposed to the labor shortages brought by the opioid crisis.
“We establish a causal link between opioids and firm values using the staggered adoption of state laws intended to limit opioid prescription rates and find a significant and positive stock price reaction, especially for those firms that depend more on workers and less on capital,” says Simintzi.
Investing in IT
The researchers also show opioid abuse is associated with greater investment in technology. The effect is concentrated in states hardest hit by the opioid crisis and in firms that rely on low-skill labor. They also document results within firms. In other words, a company with two locations will invest relatively more in technology in the location where opioid abuse is greater.
“These IT investments likely reflect labor-saving automation,”says Ye. “When that’s the case, it changes the production processes at firms, suggesting that the opioid epidemic’s negative effects on local labor markets might be permanent.”
Methodology
The UNC Kenan-Flagler research team documents a negative relationship between historic opioid prescriptions and subsequent firm growth after controlling for local economic and demographic conditions.
To explore the relationship between opioid prescriptions and firm growth – measured by firm sales and employment – they used a Compustat sample of publicly traded firms as well as establishment-level data covering public and private firms.
To evaluate how labor shortages affect firms’ production choices – whether they invest in automation to reduce dependence on labor – they used IT budgets and the count of personal computers as proxy for investment in automation and the stock of installed technology, respectively.
They measure valuation changes by looking at stock price reactions around the announcement of legislation limiting opioid prescriptions.
As of October 2018, 25 states have passed laws intended to limit opioid prescriptions:
- Alaska
- Arizona
- Connecticut
- Florida
- Hawaii
- Indiana
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- Oklahoma
- Pennsylvania
- Rhode Island
- Utah
- Washington
- West Virginia
About the University of North Carolina Kenan-Flagler Business School
Consistently ranked one of the world's best business schools, UNC Kenan-Flagler offers a broad range of programs – Undergraduate, MBA and Master of Accounting, PhD and Executive Development – and extraordinary, real-life learning experiences. Faculty demonstrate unparalleled dedication to students’ learning and a commitment to world-class research that addresses critical business challenges. Contributing to the School’s thought leadership is the Frank Hawkins Kenan Institute of Private Enterprise, which promotes innovative, market-based solutions to vital economic issues. UNC Kenan-Flagler’s collaborative culture is rooted in core values that date back to its founding in 1919, and graduates are renowned as effective, principled leaders with the technical knowledge and leadership skills to deliver results in the global business environment.
Allison Adams, University of North Carolina, http://www.kenan-flagler.unc.edu, 9199627235, [email protected]
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