risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt …

We develop a theory of optimal capital structure based on the idea that debt and equity differ in their priority status … undertake unprofitable as well as profitable investments. Among other things, our theory can explain the observation that …

for corporate leverage. The risk anomaly generates a simple tradeoff theory: At zero leverage, the overall cost of capital …. Empirically, the risk anomaly tradeoff theory and the traditional tradeoff theory are both consistent with the finding that firms … with low-risk assets choose higher leverage. More uniquely, the risk anomaly theory helps to explain why leverage is …