Subordinated Debt Theory

Subordinated debt theory suggests that the level of subordinate (or junior) debt a company takes on influences its overall debt strategy and willingness to assume additional risks. Since subordinated debt is lower priority during bankruptcy, higher amounts of this debt indicate greater risk appetite, enabling a company to leverage more capital for growth. Conversely, maintaining less subordinated debt reflects a more conservative approach. This theory helps in understanding a company's financial structure, balancing risk and return, and signaling its confidence in its ability to meet obligations while pursuing expansion.