【正文】 tem” may be the underlying cause of the recent economic and financial dislocation. Less obvious is the role of financial leverage among nonfinancial firms. To date, problems in the . nonfinancial sector have been minor pared to the distress in the financial sector despite the seizing of capital markets during the crisis. For example, nonfinancial bankruptcies have been limited given that the economic decline is the largest since the great depression of the 1930s. In fact, bankruptcy filings of nonfinancial firms have occurred mostly in . industries (., automotive manufacturing, newspapers, and real estate) that faced fundamental economic pressures prior to the financial crisis. This surprising fact begs the question, “How important is financial risk for nonfinancial firms?” At the heart of this issue is the uncertainty about the determinants of total firm risk as well as ponents of firm risk. Recent academic research in both asset pricing and corporate finance has rekindled an interest in analyzing equity price risk. A current strand of the asset pricing literature examines the finding of Campbell et al. (2021) that firmspecific (idiosyncratic) risk has tended to increase over the last 40 years. Other work suggests that idiosyncratic risk may be a priced risk factor (see Goyal and SantaClara, 2021, among others). Also related to these studies is work by P225。stor and Veronesi (2021) showing how investor uncertainty about firm profitability is an important determinant of idiosyncratic risk and firm value. Other research has examined the role of equity volatility in bond pricing (., Dichev, 1998, Campbell, Hilscher, and Szilagyi, 2021). However, much of the empirical work examining equity price risk takes the risk of assets as given or tries to explain the trend in idiosyncratic risk. In contrast, this paper takes a different tack in the investigation of equity price risk. First, we seek to understand the determinants of equity price risk at the firm level by considering total risk as the product of risks inherent in the firms operations (., economic or business risks) and risks associated with financing the firms operations (., financial risks). Second, we attempt to assess the relative importance of economic and financial risks and the implications for financial policy. Early research by Modigliani and Miller (1958) suggests that financial policy may be largely irrelevant for firm value because investors can replicate many financial decisions by the firm at a low cost (., via homemade leverage) and wellfunctioning capital markets should be able to distinguish between financial and economic distress. Noheless, financial policies, such as adding debt to the capital structure, can magnify the risk of equity. In contrast, recent research on corporate risk management suggests that firms may also be able to reduce risks and increase value with financial policies such as hedging with financial derivatives. However, this research is often motivated by substantial deadweight costs associated with financial distress or other market imperfections associated with financial leverage. Empirical research provides conflicting accounts of how costly financial distress can be for a typical publicly traded firm. We attempt to directly address the roles of economic and financial risk by examining determinants of total firm risk. In our analysis we utilize a large sample of nonfinancial firms in the United States. Our goal of identifying the most important determinants of equity price risk (volatility) relies on viewing financial policy as transforming asset volatility into equity volatility via financial leverage. Thus, throughout the paper, we consider financial leverage as the wedge between asset volatility and equity volatility. For example, in a static setting, debt provides financial leverage that magnifies operating cash flow volatility. Because financial policy is determined by owners (and managers), we are careful to examine the effects of firms? asset and operating characteristics on financial policy. Specifically, we examine a variety of characteristics suggested by previous research and, as clearly as possible, distinguish between those associated with the operations of the pany (. factors determining economic risk) and those associated with financing the firm (. factors determining financial risk). We then allow economic risk to be a determinant of financial policy in the structural framework of Leland and Toft (1996), or alternatively, in a reduced form model of financial leverage. An advantage of the structural model approach is that we are able to account for both the possibility of financial and operating implications of some factors (., dividends), as well as the endogenous nature of the bankruptcy decision and financial policy in general. Our proxy for firm risk is the volatility of mon stock returns derived from calculating the standard deviation of daily equity returns. Our proxies for economic risk are designed to capture the essential characteristics of the firms? operations and assets that determine the cash flow generating process for the firm. For example