Drywall consists of gypsum plaster that is mixed with water and flattened between two pieces of thick paper. This makes for a smooth surface. Plywood, on the other hand, consists of three or more pieces of veneer — thin pieces of wood — that are glued together so that the grain of the wood is set at a right angle, making the material stronger.
Drywall, unlike other methods of plaster, can be installed relatively quickly. The average garage can be dry-walled in a day, as opposed to waiting for a week for another form of plaster to dry. Also, if you prefer a finished look, drywall provides a smooth surface that can be painted over fairly easily once the walls dry. A garage will have a lot of wear and tear from storage items, home projects and even cars, and drywall is fairly easy to repair, so you won't have to completely replace the wall to fix a dent or hole.
Because plywood has at least three layers of veneer, it is also a fairly sturdy material. When manufacturers are creating plywood, they essentially take a tree apart, turn it into veneers and then glue it back together in a stronger fashion. A strong material like plywood can withstand normal garage wear and tear.
While drywall is technically a smooth surface, when the home and garage start to settle, the nails or screws used in construction start to bulge through, which can be unsightly.
Plywood is not a finished surface, and in order to paint over it, It will need coats of sealers and textured paint before it is ready for painting.
Both drywall and plywood absorb water -- though drywall will absorb it more easily. So, in a situation where water is near the garage, or there is a washing machine or sink in the garage, plywood would be the better option.
Choose the material that matches the rest of the house’s construction. If a different material is used, the garage could age differently than the rest of the home, which could result in costly repairs.