【正文】 Perhaps the most interesting result from our analysis is that our measures of implied financial leverage have declined over the last 30 years at the same time that measures of equity price risk such as idiosyncratic risk appear to have been increasing. In fact, measures of implied financial leverage from our structural model settle near ., no leverage by the end of our sample. There are several possible reasons for this. First, total debt ratios for nonfinancial firms have declined steadily over the last 30 years, so our measure of implied leverage should also decline. Second, firms have significantly increased cash holdings, so measures of debt debt minus cash and shortterm investments have also declined. Third, the position of publicly traded firms has changed with more risky especially technologyoriented firms being publicly listed. These firms tend to have less debt in their capital structure. Fourth, as mentioned above, firms can undertake a variety of financial risk management activities. To the extent that these activities have increased over the last few decades, firms will have bee less exposed to financial risk factors. We conduct some additional tests to provide a reality check of our results. First, we repeat our analysis with a reduced form model that imposes minimum structural rigidity on our estimation and find very similar results. This indicates that our results are unlikely to be driven by model misspecification. We also pare our results with trends in aggregate debt levels for all . nonfinancial firms and find evidence consistent with our conclusions. Finally, we look at characteristics of publicly traded nonfinancial firms that file for bankruptcy around the last three recessions and find evidence suggesting that these firms are increasingly being affected by economic distress as opposed to financial distress. In short, our results suggest that, as a practical matter, residual financial risk is now relatively unimportant for the typical . firm. This raises questions about the level of expected financial distress costs since the probability of financial distress is likely to be lower than monly thought for most panies. For example, our results suggest that estimates of the level of systematic risk in bond pricing may be biased if they do not take into account the trend in implied financial leverage ., Dichev, 1998 . Our results also bring into question the appropriateness of financial models used to estimate default probabilities, since financial policies that may be difficult to observe appear to significantly reduce risk. Lastly, our results imply that the fundamental risks born by shareholders are primarily related to underlying economic risks which should lead to a relatively efficient allocation of capital. Before proceeding we address a potential ment about our analysis. Some readers may be tempted to interpret our results as indicating that financial risk does not matter. This is not the proper interpretation. Instead, our results suggest that firms are able to manage financial risk so that the resulting exposure to shareholders is low pared to economic risks. Of course, financial risk is important to firms that choose to take on such risks either through high debt levels or a lack of risk management. In contrast, our study suggests that the typical nonfinancial firm chooses not to take these risks. In short, gross financial risk may be important, but firms can manage it. This contrasts with fundamental economic and business risks that are more difficult or undesirable to hedge because they represent the mechanism by which the firm earns economic profits. The paper is anized at follows. Motivation, related literature, and hypotheses are reviewed in Section 2. Section 3 describes the models we employ followed by a description of the data in Section 4. Empirical results for the LelandToft model are presented in Section 5. Section 6 considers estimates from the reduced form model, aggregate debt data for the no financial sector in the ., and an analysis of bankruptcy filings over the last 25 years. Section 6 concludes. 2 Motivation, Related Literature, and Hypotheses Studying firm risk and its determinants is important for all areas of finance. In the corporate finance literature, firm risk has direct implications for a variety of fundamental issues ranging from optimal capital structure to the agency costs of asset substitution. Likewise, the characteristics of firm risk are fundamental factors in all asset pricing models. The corporate finance literature often relies on market imperfections associated with financial risk. In the Modigliani Miller 1958 framework, financial risk or more generally financial policy is irrelevant because investo