Do Financial Market Developments Benefit Employees? Evidence from the Derivatives Markets

Abstract

Do innovations in financial markets affect the welfare of employees? Analyzing trading of equity options and credit default swaps (CDSs), we find that underlying firms’ employees benefit from such financial market development. The findings are consistent whether employee welfare is measured by ESG rating, employee satisfaction, workplace safety, or compensation. Firms spend more to improve the value of human capital when options or CDSs are traded on their securities. Further analysis suggests that derivatives trading affects employee welfare by reducing managerial short-termism, as information efficiency is enhanced by derivatives trading. Our findings reveal that derivatives trading is beneficial to workers.

Keywords: derivatives, options, CDS, employee welfare, managerial short-termism

JEL Classification: G14, G30, J28, J30