This paper examines the implications of leverage for corporate risk taking in a dynamic N-period model. In each period …, there is an identical, standard risk-shifting problem. Leverage creates two inefficiencies. First, we confirm the standard … intuition by which high leverage leads firms to take risk. Second, medium leverage leads firms to avert risk. By averting risk …

, evident in data from both the U.S. and Europe. Firms with medium leverage avoid risk to preserve the option of issuing safe … by debt-holders due to future risk-taking incentives. Our model offers new insights on the interaction between companies …' debt financing and their risk profiles. …

Reputation concerns in credit markets restrain borrowers' temptations to take excessive risk. The strength of these …

-levering procedure is around for the case of risk-free debt. The procedure for risky debt is much less clear even under very simplifying …

are driven by high-risk firms that are most sensitive to bankruptcy law. Examining interest rates, we find that credit …