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Beyond profit: Derivatives are linked to better outcomes for employees

Financial derivatives, long criticised as speculative tools that drive corporate greed, actually serve as a vital safeguard for employees, according to a landmark study published in the Journal of Business Ethics.

Researchers Anastasia Richmond, Dragon Yongjun Tang, and Sarah Qian Wang of Warwick Business School analysed extensive data from US public companies to examine the direct relationship between derivatives trading and workplace welfare.

Contrary to popular perception, active trading in equity options and credit default swaps (CDSs) increases corporate transparency, discourages managerial short-termism and supports greater investment in human capital.

Tackling corporate 'short-termism'

The study identifies information efficiency as a key driver.

When options and credit default swaps are actively traded, they expose underlying corporate realities faster than quarterly earnings reports alone. This heightened visibility discourages executives from engaging in short-sighted practices, such as smoothing earnings or cutting costs artificially to meet quarterly targets.

As a result, leaders are better able to make long-term investments that enhance workforce wellbeing and create sustainable value.

Sarah Qian Wang, Associate Professor at Warwick Business School said: "Our findings suggest that financial derivatives, often viewed as complex financial tools, can actually serve as a governance mechanism that strengthens a firm's ethical accountability to its employees.

"By making the long-term consequences of managerial decisions more visible, derivatives encourage managers to treat employees fairly and invest in their wellbeing." 

The effects are particularly pronounced in firms facing intense short-term market pressures, such as those operating in highly competitive industries or those subject to extensive analyst coverage.

In these settings, derivatives appear to shield managers from an excessive focus on quarterly earnings, enabling more sustainable, stakeholder-oriented decision-making.

The risks of derivatives trading

While the study documents significant benefits from derivatives trading, the authors caution that CDS markets can also create risks.

Consistent with prior research, they acknowledge that CDS-protected creditors may become 'empty creditors' who push distressed firms into inefficient liquidation.

The research does not suggest that derivatives are an unconditional good, but rather that their informational benefits can, on balance, improve stakeholder outcomes. 

The findings come as the US Securities and Exchange Commission (SEC), which regulates the US stock markets and protects investors, has expanded human capital disclosure requirements, reflecting growing investor demand for transparency around workforce treatment.

This research suggests that financial market structure, not just regulation, can shape corporate behaviour.

As investors increasingly scrutinise Environmental & Social Governance (ESG) performance, derivatives markets may play an underappreciated role in promoting ethical labour practices. 

Sarah Qian Wang is an Associate Professor of Finance. She teaches Derivatives and Corporate Risk Management on the MSc Business and Finance course.

Further reading:

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