In contrast to the standard capital structure theory prediction that builds on a trade-o¤ between interest tax shields and expected bankruptcy costs, public firms use debt quite conservatively. To address this well known debt conservatism puzzle (Graham 2000), I argue that servicing debt drains valuable liquidity for a financially constrained firm and hence endogenously creates ?debt servicing costs,?which have received little attention in the literature. To examine the in?uence of debt servicing costs on capital structure choices, I develop and estimate a dynamic corporate finance model with interest tax shields, liquidity management, investments, external debt and equity financing costs, and capital adjustment costs. By using the marginal value of liquidity as a natural measure of the debt servicing costs, I find that (1) an increase in financial leverage results in higher debt servicing costs, even with risk-free debt. (2) a smaller firm tends to experience greater debt servicing costs because of its endogenously large investment demands; and (3) in the majority of cases, equity proceeds are used for cash retention as well as capital expenditure, especially when a firm faces large current and future investment needs. Furthermore, my simulation and empirical analyses cross-sectionally show that large debt servicing costs are closely associated with low leverage and frequent equity financing.