We develop a dynamic panel threshold model of capital structure to test the dynamic trade-off theory, allowing for asymmetries in firms’ adjustments toward target leverage. Our novel estimation approach is able to consistently estimate heterogeneous speeds of adjustment in different regimes as well as to properly test for the threshold effect. We consider several proxies for adjustment costs that affect the asymmetries in capital structure adjustments and find evidence that firms with large financing imbalance (or a deficit), large investment or low earnings volatility adjust faster than those with the opposite characteristics. Firms not only adjust at different rates but also seem to adjust toward heterogeneous leverage targets. Moreover, we document a consistent pattern that firms undertaking quick adjustment are over-levered with a financing deficit and rely heavily on equity issues to make such adjustment.