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

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  • Heller, Yuval
  • Peleg-Lazar, Sharon
  • Raviv, Alon

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.

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  • Heller, Yuval & Peleg-Lazar, Sharon & Raviv, Alon, 2019. "A closed-form solution to the risk-taking motivation of subordinated debtholders," Economics Letters, Elsevier, vol. 181(C), pages 169-173.
    • Handle: RePEc:eee:ecolet:v:181:y:2019:i:c:p:169-173
    DOI: 10.1016/j.econlet.2019.05.003
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    Cited by:

    1. Heller, Yuval & Peleg Lazar, Sharon & Raviv, Alon, 2022. "Banks’ risk taking and creditors’ bargaining power," Journal of Corporate Finance, Elsevier, vol. 74(C).
    2. François, Pascal & Naqvi, Hassan, 2023. "Secured and unsecured debt in creditor-friendly bankruptcy," Journal of Corporate Finance, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Risk taking; Banks; Asset risk; Leverage; Subordinated debt;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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