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