CBOE volatility index (VIX) and corporate market leverage

Abstract

Our paper investigates the nexus between the CBOE Volatility Index (VIX) and the market leverage of firms listed on the US stock market. Analyzing the yearly database of non-financial US firms from 2000 to 2019, we find that an increase in the VIX index has a positive impact on the leverage of the corporate market. We also find robust evidence that the US-listed firms tend to use more market leverage in the future year when the VIX index ascends. Furthermore, we find a more prominent positive effect of the change in the VIX index on the long-term market leverage than the short-term market leverage. Different approaches for the panel models firmly support our findings. In addition, our research suggests that the implied volatility index is a good proxy to measure investors’ fear of securities investment and provides a good foundation for making the capital structure decisions for the firms listed on the US stock market.

Keywords:

• CBOE volatility (VIX) index
• corporate market leverage
• US-listed firms

JEL Classification:

• G18
• G30
• G32
• G38

Acknowledgement

The authors thank anonymous referees and the handling editor for their helpful comments, which help to improve our manuscript significantly. The third author would like to thank Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement. This research has been supported by the Banking University of Ho Chi Minh City, Nha Trang University, Asia University, China Medical University Hospital, The Hang Seng University of Hong Kong, Research Grants Council (RGC) of Hong Kong (project numbers 12502814 and 12500915), and Ministry of Science and Technology (MOST, Project Numbers 106-2410-H-468-002 and 107-2410-H-468-002-MY3), Taiwan. However, any remaining errors are solely ours.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the Ministry of Science and Technology, Taiwan [106-2410-H-468-002]; Ministry of Science and Technology, Taiwan [107-2410-H-468-002-MY3]; Hang Seng University of Hong Kong [12500915]; Hang Seng University of Hong Kong [12502814].