A closed-form solution to the risk-taking motivation of subordinated debtholders
classification
💰 econ.TH
keywords
debtjuniorvalueclosed-formsolutionassetbanksblack
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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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