A closed-form solution to the risk-taking motivation of subordinated debtholders
Theoretical Economics
2020-06-30 v1
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.
Cite
@article{arxiv.2006.15309,
title = {A closed-form solution to the risk-taking motivation of subordinated debtholders},
author = {Yuval Heller and SharonPeleg-Lazar and Alon Raviv},
journal= {arXiv preprint arXiv:2006.15309},
year = {2020}
}