Compensating a manager with equity-based pay induces effort but also exposes the manager to firm-specific risk. In comparison to a diversified shareholder, this distorts the manager's discount rate and, in turn, investment and financing decisions. We embed this agency conflict in a structural model of the firm and estimate its effect on firm policies. We estimate the agency friction for a large panel of U.S. public firms and find significant cross-sectional and time-series variation in a manager's incentive to over-or under-invest. Our panel of incentive estimates helps to explain a broad set of empirical patterns, including investment, leverage, cash holdings, valuation ratios, and acquisition activity.