Abstract: The study empirically tests the speed of adjustment of a sample of Malaysian firms. We find that Shari’ah compliance influences the speed of adjustment implying that cost of capital for Shari’ah compliant firms differ from non-compliant firms. Our tests further show that Shari’ah compliant companies whose leverage leves are above target tend to adjust more rapidly to target levels than non-compliant firms. The evidence provides an opposite conclusion on firms below target levels. The findings provide a notion of debt versus equity choice for Shari’ah compliant firms versus non-compliant firms indicating that preference is guided by implied cost of capital which differs based on the extent of current leverage levels.