A Closed-Form Solution to the Risk-Taking Motivation of Subordinated Debtholders
13 Pages Posted: 20 May 2019
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: 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
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