Title: Do CDS affect labour markets? Evidence from impacts on labour investment efficiency

Authors: Paulo Pereira da Silva

Addresses: CEFAGE, Universidade de Évora, Palácio do Vimioso, Largo Marquês de Marialva 8, 7000-809 Évora, Portugal; CMVM, Portuguese Securities Commission, Rua Laura Alves no. 4, 1064-003 Lisbon, Portugal; ISCAL – Lisbon Accounting and Business School, Avenida Miguel Bombarda, 20, 1069 – 035 Lisbon, Portugal

Abstract: This study addresses the impact of credit default swap (CDS) contracts on labour investment efficiency. We postulate that by changing the incentives of managers, shareholders, and creditors, CDS weighs on employment growth. The empirical analysis covers a large set of listed US firms, subdivided into CDS-referenced firms and control firms (i.e., not exposed to CDS trades). By means of a difference-in-differences approach, we find that labour investment inefficiency is alleviated in the wake of initiating CDS trade. That impact is economically material: abnormal labour investment goes down by at least 4.4% in the wake of CDS onset. A subsample analysis shows that the impact is akin to the reduction of overinvestment. Our interpretation is that the higher bankruptcy risk propelled by CDS onset exerts a disciplinary role on the firm's managers. That is, it dissuades empire building and investment in underperforming projects, thereby fostering the efficiency of resource allocation.

Keywords: credit default swaps; CDS; agency conflicts; corporate investment; labour efficiency.

DOI: 10.1504/IJBAAF.2025.151864

International Journal of Banking, Accounting and Finance, 2025 Vol.15 No.3, pp.213 - 239

Accepted: 16 Jul 2024
Published online: 24 Feb 2026 *

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