We examine the effect of stock liquidity and corporate governance on the firm's leverage decision in the order-driven stock trading system and less stringent governance environment of Australia. Using a sample of 1207 non-financial firms from 2001 to 2013, resulting in 9855 firm-year observations, we find the posited negative stock liquidity–leverage relation, confirming prior research observations that firms with more liquid stocks are significantly less leveraged. We also find a significant and negative relation between corporate governance quality (CGQ) and leverage, indicating that firms with high CGQ significantly reduce leverage. In a closer analysis, we find that the significantly negative CGQ–leverage relation exists only for firms with high stock liquidity and does not exist for firms with low stock liquidity. Our study is the first to examine such an interactive relationship among stock liquidity, corporate governance and leverage. The results, which are robust to a range of alternative proxies and to additional tests, provide new insights into the determinants of leverage.