<p>This study examines the effect of increased stock liquidity on the speed of corporate leverage adjustment toward the optimal leverage. We find that overleveraged firms with high liquidity reduce their leverages at a lower speed than that of their low-liquidity counterparts. In contrast, we find that underleveraged firms with high liquidity adjust leverage at a higher speed than that of their low-liquidity counterparts. These empirical results are attributed to the fact that both overleveraged and underleveraged firms with high liquidity face a lower cost of debt when managers can make more informed investment decisions from enhanced liquidity. Our empirical findings shed new light on the importance of stock liquidity in firms’ dynamic capital structure adjustments.</p>