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

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.

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Year of publication:	2019-04-30
Authors:	Heller, Yuval ; Peleg Lazar, Sharon ; Raviv, Alon

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Type of publication:	Book / Working Paper
Language:	English
Notes:	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)
Classification:	G21 - Banks; Other Depository Institutions; Mortgages ; G28 - Government Policy and Regulation ; G32 - Financing Policy; Capital and Ownership Structure ; G38 - Government Policy and Regulation
Source:	BASE

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