A closed-form solution to the risk-taking motivation of subordinated debtholders

Heller, Yuval and Peleg Lazar, Sharon and Raviv, Alon (2019): A closed-form solution to the risk-taking motivation of subordinated debtholders. Forthcoming in: Economic Letters No. forthcoming (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’ subdebt.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk taking, Banks, Asset risk, Leverage, Subordinated debt.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation

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