This paper examines the impact of financing decisions on risk-averse managers, focusing on the 'volatility costs' of debt. The author quantifies these costs and investigates their influence on financing choices. Key findings include: 1. **Large Volatility Costs**: The volatility costs of debt can be significant, especially when the CEO owns in-the-money options. 2. **Impact of Option Ownership**: Higher option ownership tends to increase, rather than decrease, the volatility costs of debt. 3. **Stock Price Influence**: A rise in stock price typically reduces managerial preference for leverage, consistent with prior research on security issues. The paper also estimates the volatility costs of debt for a large sample of U.S. firms and tests whether these costs affect actual financing decisions. Empirical results show that volatility costs significantly influence both the level and short-term changes in debt. Additionally, a probit model suggests that managerial preferences play a crucial role in a firm's choice between debt and equity financing.This paper examines the impact of financing decisions on risk-averse managers, focusing on the 'volatility costs' of debt. The author quantifies these costs and investigates their influence on financing choices. Key findings include: 1. **Large Volatility Costs**: The volatility costs of debt can be significant, especially when the CEO owns in-the-money options. 2. **Impact of Option Ownership**: Higher option ownership tends to increase, rather than decrease, the volatility costs of debt. 3. **Stock Price Influence**: A rise in stock price typically reduces managerial preference for leverage, consistent with prior research on security issues. The paper also estimates the volatility costs of debt for a large sample of U.S. firms and tests whether these costs affect actual financing decisions. Empirical results show that volatility costs significantly influence both the level and short-term changes in debt. Additionally, a probit model suggests that managerial preferences play a crucial role in a firm's choice between debt and equity financing.