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 with medium leverage avoid risk to preserve the option of issuing safe …

We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and …

Using a news-based index of aggregate policy uncertainty in the US economy, we document a strong negative relation … between policy uncertainty and corporate risk-taking. We show that high levels of policy uncertainty are associated with … uncertainty is high, CEOs sell more own-firm shares and exercise fewer options, firms are more likely to use financial hedging …

activities. For this purpose, I propose a novel measure of synthetic leverage, which can be estimated based on publicly available … information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage …