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

Yuval Heller; Sharon Peleg-Lazar; Alon Raviv

doi:10.1016/j.econlet.2019.05.003

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

Yuval Heller, Sharon Peleg-Lazar, Alon Raviv

Bar-Ilan University, Tel Aviv University

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	169-173
Number of pages	5
Journal	Economics Letters
Volume	181
DOIs	https://doi.org/10.1016/j.econlet.2019.05.003
State	Published - Aug 2019

Keywords

Asset risk
Banks
Leverage
Risk taking
Subordinated debt

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/j.econlet.2019.05.003

Cite this

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title = "A closed-form solution to the risk-taking motivation of subordinated debtholders",

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{\textquoteright} junior debt.",

keywords = "Asset risk, Banks, Leverage, Risk taking, Subordinated debt",

author = "Yuval Heller and Sharon Peleg-Lazar and Alon Raviv",

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year = "2019",

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doi = "10.1016/j.econlet.2019.05.003",

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AU - Raviv, Alon

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N2 - 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.

AB - 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.

KW - Asset risk

KW - Banks

KW - Leverage

KW - Risk taking

KW - Subordinated debt

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DO - 10.1016/j.econlet.2019.05.003

M3 - مقالة

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EP - 173

JO - Economics Letters

JF - Economics Letters

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

Abstract

Keywords

All Science Journal Classification (ASJC) codes

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