Previous studies have documented that firms’ efforts to time equity issuance based on the market sentiment significantly affect their capital structures while pursuing long term targets for leverage and credit ratings. In this paper, we examine whether in the short term, firms adjust their capital structure in response to changes in underlying risk. We find that firms engage in risk timing in the sense that firms try to lower their leverage ratios by issuing equities when risks are high and vice versa. Using various measures of risks including equity volatility, idiosyncratic risk and measures of financial distress and operating risk, we present evidence that is consistent with the risk timing behavior after controlling for various factors that are known to affect firms’ capital structure decision. Managers are found to time capital structure decisions to the benefit of their firms by taking advantage of favorable market conditions as well as maintaining an appropriate risk level. And while market timing benefits the firm at the expense of uninformed investors, these investors receive benefits from managerial risk timing. Finally, we find that firms not only have long term targets for leverage, but also residual fluctuation around these targets that is consistent with the trade-off theory.