This study fills a gap in capital structure literature by identifying conditions and mechanisms of equity markets that make Pakistani firms financing decisions more relevant and predictable. These conditions are high stock valuations of companies by the investors, that make managers decisions more advantageous to them by issuing more stocks of a company when equity is overvalued in other words when it is cheap and repurchase the equity when it is undervalued in other words when it is expensive. KSE is showing all the time high indices, particularly current research in this area would help to gauge new fact about the firms’ subject to stock market valuations. Although, market timing theory proved to be very significant factor for firms in determining their capital structure decisions. This study used the data of 104 non-financial firms listed at Karachi Stock Exchange for the period of 1999 to 2011 to identify that either firm in Pakistan time the equity markets or this phenomena is flat. The core principle of market timing theory that firms go for issuances of securities when their prices are high in the market has been observed in this study. Ordinary Least Squares (OLS) method were applied, the study found the evidence that, in short run firms consider the market valuations if going to issue equity; however, the results lost the economic significance when test of persistence were applied. Pakistani stock markets are not as developed as the developed World, so this is hard to import the explanations of market timing theory as argued there. This does not rule out the fact that the market timing effects on capital structure decision are nil. Moreover, the results showed that profitability found to have significant negative relationship with leverage. This may be due to fact the higher costs of raising fund vi externally compelled the firm to use internal sources to fulfill the investment needs. This study also incorporate the industry dummy analysis to find out the industry specific effects, results found food, engineering, communication, chemical, cement, motor vehicle, petroleum, paper and boar, tobacco have different effects than the reference industry (textile industry). In short, our results developed the concept that firm in Pakistan may consider the market timing effect to change their capital structure decisions. Supervisor :-Dr. Arshad Hassan