In this paper we show that the volatility of risk is an important factor in explaining capital structure choices of firms. This effect is over and above the traditional determinants of capital structure such as the current level of risk, size, market-to-book ratio, tangibility of assets and profitability. We show that both (1) the fraction of debt in total new external financing raised by the firm, and (2) the long term debt as a fraction of the assets of the firm, are decreasing in the volatility of risk of the firm. Moreover this negative relationship is significantly stronger for firms that do not have a credit rating. These results are consistent with the theoretical reasons that we provide to explain the negative relationship between leverage and volatility of risk.