This paper examines how risk-averse managers' financing incentives are affected by leverage and stock-based compensation. It finds that the volatility costs of debt can be significant, especially when the CEO owns in-the-money options. The paper quantifies these costs and shows that they influence financing decisions. Empirical analysis of a large sample of U.S. firms reveals that volatility costs affect both the level and short-term changes in debt. A probit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity. The paper explores how leverage affects CEOs through its impact on stock volatility. CEO welfare is measured as the certainty equivalent of wealth, accounting for the manager's risk aversion. The impact of a change in debt is simply the associated change in CE. The paper finds that the volatility costs of debt can be large, particularly when the CEO owns in-the-money options. Options can discourage risk taking and leverage, especially when they make up a large fraction of the portfolio. The paper also shows that the direction of incentives and key comparative statics are robust to different assumptions about risk aversion and outside wealth. The results suggest that stock-based compensation can make debt financing costly to executives. The paper tests whether managers' incentives help explain actual financing decisions for a large sample of U.S. firms. The analysis shows that financing incentives are an important determinant of leverage. The paper uses a numerical approach to estimate financing incentives, considering the CEO's portfolio and firm characteristics. It finds that financing incentives vary strongly with firm characteristics. The results suggest that stock options often discourage managerial risk taking and leverage. The paper also shows that Black-Scholes and CE approaches to analyze risk incentives differ substantially. They disagree not only about the direction and magnitudes of incentives, but also about how incentives vary across firms. Empirically, the correlation between Black-Scholes and CE incentives is negative and close to zero.This paper examines how risk-averse managers' financing incentives are affected by leverage and stock-based compensation. It finds that the volatility costs of debt can be significant, especially when the CEO owns in-the-money options. The paper quantifies these costs and shows that they influence financing decisions. Empirical analysis of a large sample of U.S. firms reveals that volatility costs affect both the level and short-term changes in debt. A probit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity. The paper explores how leverage affects CEOs through its impact on stock volatility. CEO welfare is measured as the certainty equivalent of wealth, accounting for the manager's risk aversion. The impact of a change in debt is simply the associated change in CE. The paper finds that the volatility costs of debt can be large, particularly when the CEO owns in-the-money options. Options can discourage risk taking and leverage, especially when they make up a large fraction of the portfolio. The paper also shows that the direction of incentives and key comparative statics are robust to different assumptions about risk aversion and outside wealth. The results suggest that stock-based compensation can make debt financing costly to executives. The paper tests whether managers' incentives help explain actual financing decisions for a large sample of U.S. firms. The analysis shows that financing incentives are an important determinant of leverage. The paper uses a numerical approach to estimate financing incentives, considering the CEO's portfolio and firm characteristics. It finds that financing incentives vary strongly with firm characteristics. The results suggest that stock options often discourage managerial risk taking and leverage. The paper also shows that Black-Scholes and CE approaches to analyze risk incentives differ substantially. They disagree not only about the direction and magnitudes of incentives, but also about how incentives vary across firms. Empirically, the correlation between Black-Scholes and CE incentives is negative and close to zero.