A Closed-Form Solution to the Risk-Taking Motivation of Subordinated Debtholders

13 Pages Posted: 20 May 2019

See all articles by Yuval Heller

Yuval Heller

Bar Ilan University

Sharon Peleg Lazar

Tel Aviv University

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Date Written: February 2019

Abstract

Black and Cox (1976) claim that the value of junior debt is increasing in asset risk when the firm's value is low. We show, using closed-form solution, that the junior debt's value is hump-shaped. This has interesting implications for the market-discipline role of banks' junior debt (subdebt).

Keywords: Risk Taking, Banks, Asset Risk, Leverage, Subordinated Debt

JEL Classification: G21, G28, G32, G38

Suggested Citation

Heller, Yuval and Peleg Lazar, Sharon and Raviv, Alon, A Closed-Form Solution to the Risk-Taking Motivation of Subordinated Debtholders (February 2019). Available at SSRN: https://ssrn.com/abstract=3381503 or http://dx.doi.org/10.2139/ssrn.3381503

Yuval Heller

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

Sharon Peleg Lazar

Tel Aviv University ( email )

Tel Aviv
Israel

Alon Raviv (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

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