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

Yuval Heller (), Sharon Peleg Lazar and Alon Raviv ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Risk taking; Banks; Asset risk; Leverage; Subordinated debt. (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ore and nep-rmg
Date: 2019-04-30
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