We study a dynamic contracting problem in which size is relevant. The agent may take on excessive risk to enhance short … curb risk taking. Firms that are less prone to risk taking can afford a higher leverage …

risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value …

I develop a dynamic capital structure model to examine how the nature of risk affects firm's debt policy. In the model …, firm's fundamental risk, captured by its cash flow process, consists of transitory and persistent parts with markedly … different dynamics. The model explains the observed dispersion in the risk-leverage relationship. Firms with similar total …