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

Abstract

Do financial market developments matter for rank-and-file workers? We find that equity options or credit default swaps (CDS) trading on a firm improves employee welfare ratings. The results are robust to alternative welfare outcome measures including a firm’s selection into "Best Companies to Work for", workplace safety, pay inequality and pay level. We further find that derivatives trading decreases managerial short-termism by stimulating informed trades. The derivatives trading effects on employee welfare are more pronounced in firms with high market competition, technological intensity, and analyst coverage. Firms spend more on human capital development when derivatives linked to their equity or debt are actively traded. These findings suggest that derivatives can have real effects on employee welfare by reducing managerial short-termism.

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

JEL Classification: G14, G30, J28, J30