While extensive research examines the relation between option incentives in executive compensation and risk-taking by managers, the impact of capital structure on this relationship has received little empirical attention. Prior work suggests that heightened managerial career concerns arising...

This paper examines the dynamic relationship between firm leverage and risktaking. We embed the traditional agency problem of asset substitution within a multi-period model, revealing a U-shaped relationship between leverage and risktaking, evident in data from both the U.S. and Europe. Firms...