The paper examines the trade-off theory of capital structure, allowing for costly adjustment. The authors confirm that firms' financing behavior is consistent with the presence of adjustment costs and use a dynamic duration model to show that firms actively rebalance their leverage to stay within an optimal range. They find that firms respond to changes in equity value by adjusting their leverage over two to four years. The presence of adjustment costs often prevents immediate responses, leading to persistent leverage shocks. The evidence suggests that this persistence is more likely due to optimizing behavior in the presence of adjustment costs rather than market timing or indifference. The study challenges the conclusions of recent empirical studies that argue against the trade-off theory, suggesting that the persistent behavior of leverage is better explained by adjustment costs.The paper examines the trade-off theory of capital structure, allowing for costly adjustment. The authors confirm that firms' financing behavior is consistent with the presence of adjustment costs and use a dynamic duration model to show that firms actively rebalance their leverage to stay within an optimal range. They find that firms respond to changes in equity value by adjusting their leverage over two to four years. The presence of adjustment costs often prevents immediate responses, leading to persistent leverage shocks. The evidence suggests that this persistence is more likely due to optimizing behavior in the presence of adjustment costs rather than market timing or indifference. The study challenges the conclusions of recent empirical studies that argue against the trade-off theory, suggesting that the persistent behavior of leverage is better explained by adjustment costs.