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Current study empirically examines the relationship between corporate strategy and capital structure, specifically product diversification and leverage ratio of manufacturing firms in Pakistan. By using sample data of 137 listed firms, including 51 product diversified firms and 86 focused firms, Ordinary Least Square (OLS) model is used for examining the relationship between a firm‟s corporate strategy and capital structure. Descriptive statistics show that diversified firms have more leverage than those of focused firms, which is consistent with the coinsurance effect theory. However, empirical findings depict that diversification has significant negative relationship with debt ratio as diversified firms have more internal sources of funds therefore, with increase in diversification, dependency on debt (out sourcing) decreases. Keywords: Product Diversification, Capital Structure, Firms, Pakistan.

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