In a continuous-time game, a risk-neutral decision-maker chooses the volatility of a state variable, and a stopper terminates the game. I provide conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if he faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I study two applications: a levered corporation and a mutual fund with uncertain productivity. When investors are about to default or withdraw their capital, managers attempt to preserve their rents by minimizing risk. Rents originate from current payoffs, growth opportunities, or managerial overconfidence.

Myers (1977) described how firms can gamble using asset substitution, which is switching to a less efficient and more volatile project. Gambling using derivatives is a sharper instrument, allowing the owners to gamble just to what is needed, and with negligible efficiency loss. In our model, “gambling for redemption” operates at small scale and is socially beneficial, while “gambling for ripoff” operates at large scale and is socially inefficient but benefits firm owners (at the expense of bondholders). Superpriority laws grant Qualified Financial Contracts (QFCs) bankruptcy law exemptions, which make more funds available for gambling. This reduces firm value due to difficulty borrowing in the face of more gambling for ripoff.

We show that short-term debt in a firm’s optimal capital structure reduces investment under asymmetric information. Investors’ interpretation of underinvestment as a positive signal about the quality of the assets in place allows the equity holders to profit from short-term debt repricing at the rollover stage. Thus, underinvestment is more pronounced at shorter maturities, in contrast to Myers (1977). Low types’ incentives to mimic put an endogenous constraint on high types’ underinvestment payoff via a duration floor. Perhaps most strikingly, because cash lowers the duration floor, an increase in a firm’s retained earnings can decrease investment.