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

Abstract Do financial derivatives influence firms’ fulfillment of their ethical responsibilities toward employees? Drawing on stakeholder theory and corporate moral responsibility, we examine whether trading in equity options and credit default swaps (CDSs) influences employee welfare in underlying firms. We find that active derivatives trading is associated with significant improvements in employee welfare, including higher ESG employee scores, greater employee satisfaction, safer workplaces, and better compensation. Firms also increase investments in human capital when options or CDSs are actively traded on their equity or debt instruments. Further analysis suggests that derivatives trading improves employee welfare by mitigating managerial short-termism and encouraging stakeholder oriented decision making. Overall, our findings suggest that financial derivatives can strengthen firms’ ethical accountability to employees.