  This paper investigates whether security markets price the effect of social
distancing on firms' operations. We document that firms that are more resilient
to social distancing significantly outperformed those with lower resilience
during the COVID-19 outbreak, even after controlling for the standard risk
factors. Similar cross-sectional return differentials already emerged before
the COVID-19 crisis: the 2014-19 cumulative return differential between more
and less resilient firms is of similar size as during the outbreak, suggesting
growing awareness of pandemic risk well in advance of its materialization.
Finally, we use stock option prices to infer the market's return expectations
after the onset of the pandemic: even at a two-year horizon, stocks of more
pandemic-resilient firms are expected to yield significantly lower returns than
less resilient ones, reflecting their lower exposure to disaster risk. Hence,
going forward, markets appear to price exposure to a new risk factor, namely,
pandemic risk.

General Finance;General Economics;Economics;Risk Management